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“Today, we walk into this house with an iconic South African plant, the aloe ferox. It has a long history of medicinal use. It is resilient, sturdy and drought resistant. It withstands the elements. We must take the bitter with the sweet. Today, I bring you a seed to prove that if we plant anew, we can return to those plum times.”
The words of Tito Mboweni, Budget Speech 2019

Kemp Munnik, Head of Structured Solutions at Bravura, an independent investment banking firm specialising in corporate finance and structured solutions, comments that the 2019 Budget was keenly watched by local and international investors as it is essential to restore the credibility of South Africa’s finances. It also informs decisions of the credit rating agencies about South Africa’s fiscal stability.

Munnik says: “Finance minister Tito Mboweni had a lot of weight resting on his shoulders this afternoon. The 2019 Budget took place against a stark and sobering set of factors. Public sector debt has more than doubled over the past ten years. Eskom is in crisis and needs public funds and significant restructuring to survive. An election is around the corner and public spending demands are rising. Corruption and state capture led to very weak economic growth.”

Mboweni’s address was again an honest appraisal of the difficult circumstances in which South Africa finds itself.

In the face of adversary circumstances Mboweni built his budget on six key factors:

•  Achieving a higher rate of economic growth
•  Increasing tax collection
•  Stabilising and reducing debt
•  Reasonable, affordable expenditure
•  Reconfiguring state-owned enterprises
•  Managing the public sector wage bill

Achieving a higher rate of economic growth

The medium-term economic outlook has been revised down, with a GDP growth forecast of 1.5% in 2019, rising to 2.1% in 2021. Mboweni said that many of the risks warned about have materialised. A slower but still steady recovery after the 2018 technical recession is now expected.

At the heart of South Africa’s problems is the fact that the economy is not growing. President Ramaphosa clearly recognises this and is trying to kick-start the economy by promoting new business investment.

Munnik comments: “Historically, growth in South Africa has been highly correlated with global growth rates. One of the great disappointments of 2017 and 2018 has been the economy’s failure to escape from its current stagnation despite strong synchronised global growth. Given that there are increasing signs that the world economy is now slowing, it is difficult to be more optimistic than the Treasury about economic growth in 2019, or to expect better than its cautious revenue projections.

South Africa’s low economic growth figures have hampered efforts to create jobs and address unemployment, but have also weighed on revenue collection – and mismanagement at the South African Revenue Service (SARS) has not helped.”

In 2018/19, tax revenue has been revised down by R15.4 billion compared to the October 2018 Medium Term Budget Policy Statement (MTBPS) estimate. Approximately half of the increase in the shortfall since October is due to higher than expected VAT refunds.

After a number of years of tax increases, more recent hikes in tax rates have led to far lower than expected increases in tax collection, as the economy is under such strain. In the 2019 Budget, the rates of government’s major sources of tax income – Vat, personal income tax and corporate income tax – have not been adjusted.

It seems that Mboweni is confident that more tax will be collected due as SARS is fixed. He mentioned the following initiatives:

•  A new SARS Commissioner will be appointed in the coming weeks.
•  A new Illicit Economy Unit launched in August 2018 will fight the trade in illicit cigarettes and tobacco.
•  The large business unit will be reintroduced and will be formally launched in early April 2019.
•  SARS is strengthening its IT team and its IT systems.
•  Information sharing agreements with allies will help fight cross-border tax evasion schemes.
•  Judge Davis will assess the tax gap, which is the difference between revenue collected and what ought to be collected.

Munnik concludes: “Fixing the tax collection system can be done, but it will take a number of years. However, even if the tax system is fixed, the problem of insufficient state revenues will persist as long as South Africa remains trapped in economic stagnation.”

Stabilising and reducing debt

Mboweni gave a sobering summary of the South African economy: “In this coming year, we expect revenues of R1.58 trillion and spending of R1.83 trillion. That means we will spend R243 billion more than we earn. Put another way, we are borrowing about R1.2 billion a day, assuming that we don’t borrow money on the weekend.

This coming year, interest expenditures will be R209.4 billion. This is R1 billion per day. The
expenditure and tax adjustments are designed to largely counteract the additional allocation for Eskom and the revenue shortfall. As a result, gross national debt will still stabilise at about 60% of GDP in 2023/24, broadly in line with our October forecast. We are masters of our own destiny.”

Reasonable, affordable expenditure

Mboweni recognised that with higher revenues not the solution, cuts in expenditure are required. Since October 2018, government has taken steps to adjust baseline expenditure downwards by a total of R50.3 billion over the medium term. Half of these reductions have come from adjustments to government’s spending on compensation. R12.8 billion
comes from measures to reduce spending on specific programmes.

Where will the expenditure cuts be made?

Reconfiguring state-owned enterprises (SOEs)

Mboweni admitted that SOEs pose very serious risks to the fiscal framework. Funding requests from SAA, SABC, Denel, Eskom and other financially challenged state-owned enterprises have increased, with several requesting state support just to continue operating.

In the State of the Nation Address, the President announced a clear and executable plan for
electricity. At the core of this plan is the subdivision of Eskom into three independent
components. This will set the electricity market on a new trajectory, and allow for more
competition, transparency and a focused funding model.

Mboweni did not mince his words on Eskom: “Pouring money directly into Eskom in its current form is like pouring water into a sieve. I want to make it clear: the national government is not taking on Eskom’s debt. Eskom took on the debt. It must ultimately repay it. “

R23 billion a year is re-allocated to financially support Eskom during its reconfiguration.
The fiscal support is conditional on an independent Chief Reorganisation Officer (CRO) being
jointly appointed by the Ministers of Finance and Public Enterprises with the explicit mandate of delivering on the recommendations of the Presidential Task Team. The financial support package, with strict conditions attached, will enable Eskom to service its debts and meet redemption requirements, and secure the necessary liquidity to undertake urgent maintenance to restore stable electricity supply

Establishing a more competitive electricity sector will improve business and consumer confidence, encourage private investment and reduce upward pressure on prices. Further steps in restructuring the electricity market will be announced in the months ahead.

Mboweni also said that Cabinet is considering a proposal to end the issuing of guarantees to SOEs for operational purposes. Expiration dates on guarantees will also be strictly enforced. As the President announced, strategic equity partners will be found where possible.

Managing the public sector wage bill

Mboweni clearly stated that the public wage bill is unsustainable. To support higher levels of capital investment, the state needs to contain the public-service wage bill, which has crowded out spending in other areas. National and provincial compensation budgets will be reduced by R27 billion over the next three years.

Allowing older public servants to retire early will save an estimated R4.8 billion in 2019/20, R7.5 billion in 2020/21 and R8 billion in 2021/22. The details of the early retirement framework will be released during the course of this week. In time this will be complemented by limits on overtime and bonus payments as well as pay progression.

Members of Parliament and provincial legislatures and executives at public entities will not be receiving a salary increase this financial year.

Munnik comments: “During the Zuma presidency, there was a massive increase in the state’s remuneration bill. Between the fiscal years 2006/7 and 2017/18, the compensation of government employees grew at an annual rate of 11.2%. In the same period, the current value of the gross domestic product (GDP) expanded by an average of 8.6% annually. Over 11 years, wages have grown 3.2 times while the value of economic activity, from which taxes are levied, grew only 2.5 times.

Bringing the spiraling public sector wage bill under control is essential if fiscal sustainability is to be restored. This will require difficult negotiations with a key ANC support base, public servants and their trade unions.”

A wing and a prayer

The last decade has seen a persistent decline in South Africa’s fiscal metrics. A range of poor policies and decisions by the Zuma government, widespread corruption and poor growth are the causes of our current problems. Around three years ago, the pace of this deterioration accelerated.

Finance Minister Mboweni seemed upbeat this afternoon, but it was clear that he appreciated the seriousness of the fiscal situation. With an election around the corner and the country clinging to its last investment grade rating while economic growth continues to disappoint, the stakes are high. The decisions that need to be taken to ignite economic growth and stabilise South Africa’s finances in the long term will almost without exception be politically unpopular in the short term.

Government again has an opportunity to reinforce confidence and contribute to a recovery in growth and investment. The private sector is hoping that government will finalise many outstanding policy reforms, act decisively against corruption, and swiftly resolve governance and operational failures at state-owned companies. In time, this will lead to a strengthening rand exchange rate and lower government borrowing costs.

Published: Mail & Guardian