Budget 2019 - So what can South Africans Expect?
01 February 2019
South Africa: Budget 2019 – So what can we Expect on 20 February 2019?
The New Minister of Finance, Tito Mboweni, delivered his maiden Medium Term Budget Policy Statement (MTBPS) on 24 October 2018 against the backdrop of a technical recession, low economic growth, and unemployment. GDP growth was revised down in 2018, due to the recession. South Africa is becoming increasingly vulnerable to financial volatility and trade disruption. Government’s economic stimulus and recovery plan should foster higher growth over the medium term, but will it?
The Economy at a Glance
Growth in household consumption expenditure is projected (at time of MTBPS) at 1.6 per cent, supported by a moderate recovery in wage and employment growth, and improvements in household credit. Government endeavours to improve the investment climate through increased governance in SOEs and adjustments in energy and mining. Hopefully the infrastructure fund will promote investment in capital projects. The Rand weakened against the USD in the first three quarters of 2018, due to a stronger USD, negative investor sentiment, trade tensions, and low domestic growth. The hope is that the Rand will strengthen in light of the President’s and Minister of Finance’s work on attracting FDI, and also the continued efforts to eradicate fraud, especially in government and SoEs. Unemployment remains a constant problem in South Africa, at some 27 per cent. This should be high on the Minister’s agenda on 20 February 2019. Inflation averaged 4.5 per cent in the first eight months of 2018, driven by lower food inflation. Core inflation excluding food, fuel and electricity, decreased. However, of real concern is the rising electricity and fuel prices.
Main budget revenue is expected to still hover around 26 per cent of GDP. Main budget expenditure is expected to remain at about 30 per cent of GDP. One of our main issues in South Africa is the budget deficit (estimated at almost 4.5 per cent of GDP, and increasing) further put under pressure by tax shortfalls. This spirals into higher debt which increasing debt service costs. The Minister will do well if he addresses the widening main budget deficit (nearing 1 per cent of GDP). Revenue shortfalls are always set-off, to some extent by tax increases, which will hopefully not be seen on Budget Day. Revenue collections is expected to be lower than anticipated, but the Acting Commissioner for SARS’ redirection of the institution may surprise us on Budget Day. At the time of the MTBPS, net VAT Collections accounted for about R20b of in-year revenue shortfall. The VAT refund backlog has in all likelihood not been cleared even closely and will continue to impact Net VAT collections negatively (an estimated R11b to clear). SARS committed to pay VAT refunds within 21 working days in future. Taxpayers funding the fiscus – quite a novel funding approach! Corporate income tax collections will arguably remain under pressure due to weak GDP performance. Personal income tax is negatively impacted by job losses, low to moderate wage settlements, lower bonus payments, and slower public sector employment expansion. The Nugent Commission of Inquiry underlined the severity of governance and administrative weaknesses in SARS, which will hopefully be addressed on Budget Day. So far, Government proposals to zero rate white bread flour, cake flour, and sanitary pads to more effective help low-income households, will still happen on 1 April 2019. If Government reconsidered, it could actually rather collect the VAT on all zero rated supplies (except for exports), and redistribute in a targeted approach to the poor. We may also see (hopefully) some movement in aligning our VAT system to those more sophisticated systems globally, with regard to inter-jurisdictional provisions. It is expected that tax increases will not be announced, especially in an election year, although annual adjustments to personal income tax brackets, for inflationary effects can be expected (bracket-creep).
National expenditure amounted to R1.4 trillion in 2017/18. Employee remuneration remains the largest spending item in provincial budgets. Government spending is expected to reach R2.1 trillion in 2021/22, and remains a serious concern. SoEs remain a problem to manage, and although Government is seemingly trying to redirect, the speed at which this is happening does not make a meaningful contribution yet. SoEs such SAA, SAPO, SA Express, and Eskom will expectedly continue to pull funds from Government and wherever else, which could have been productively deployed to kick-start our economy. The Public Sector Wage bill will, for the foreseeable future, remain the largest share of government expenditure by economic classification. Government’s current wage bill accounts for about 35 per cent of consolidated spending. The main drivers of increased spending are large increases in wages and other employee benefits; above-inflation agreements between government and unions; and wage progression and promotion policies. This is a double-edged sword. On the one hand Government needs to contain or even reduce the size of the Public Sector (which is clearly out of kilter by international standards), but on the other it also needs to manage the ever-increasing unemployment figure. Public sector infrastructure projects have been adversely impacted by weak project preparation, planning and execution, and a lack of technical expertise and institutional capacity. These weaknesses result in over- and under-spending. Government’s project preparation facility will hopefully shift the gear.
South Africa’s GDP has been under pressure for a number of years. The Minister of Finance (perhaps with the assistance of National Treasury), seems to always (on Budget Day) overestimate the positives and underestimate the negatives, which is then revised during the MTBPS and the subsequent National Budget. This is a trend that needs to stop. The National Development Plan (NDP) and the medium-term strategic framework set a goal of 5.4 per cent GDP growth. GDP has, however, over the last decade averaged 1.8 per cent. Government’s growth initiatives focus on five interventions, which if managed well go do good damage. The MTBPS set as priorities, the implementation of the President’s economic stimulus and recovery plan announced in September 2018 (focusing public spending in areas to grow, create jobs, accelerate growth-enhancing reforms, promote infrastructure development, and alleviate education and healthcare problems), through encouraging private-sector investment; improving governance and financial management at the three government levels to support service delivery; and reforming SOEs. Some positive feedback on this at Budget Day would be welcomed.
One of South Africa’s biggest nightmares is the increasing debt and debt servicing costs. These are attributable to many factors, amongst them the debt of national public entities and SOEs. We can expect more bad news on 20 February 2019 as it seems that Government finds this aspect difficult or even impossible to manage. This is further impacted by the growth of unpaid bills and accruals in provincial and local governments; government debt servicing cost; and the increase in Government’s gross borrowing requirements. Gross debt is projected to stabilise at a high 60 per cent of GDP in 2023/24, which can largely be attributed to currency depreciation (approximately 70 per cent of the upward revision in gross loan debt). Government’s debt management strategy includes strategic benchmarks for interest, inflation, the currency, and refinancing. Government has in recent years increased the debt maturity profile and refinanced risk in the long-term debt portfolio. National Treasury’s efforts to strengthen financial management of the SOEs include working with the Auditor-General and law enforcement agencies to reduce irregular expenditure in government, improve transparency, and reduce fraud and opportunities for corruption; enhancing public finance capacity-building in local government. Procurement policy also aims to support small and black-owned businesses; and developing a framework that will include financial recovery plans to address non-performing departments. Government initiated reforms in SOEs to improve governance and strengthen financial management over the past year. New boards and executives have been appointed at Denel, Transnet, SA Express Airways and PRASA. The Auditor-General is working with private firms on the audits of several SOEs. The boards of SOEs have initiated forensic investigations into corruption allegations. The Eskom board is preparing a long-term turnaround strategy which was to be presented to government in November 2018, and several other SOEs have updated their turnaround strategies. Many SOEs’ access to credit has declined, due to weak balance sheets, poor corporate governance, and illiquidity, which will make it difficult to refinance maturing debt. At the time of the MTBPS, the Minister was of the view that SA is unlikely to face significant refinancing and rollover risk despite the higher borrowing requirement. This means that government will have sufficient cash to settle obligations as they fall due. Non-residents hold 38 per cent of SA’s foreign and domestic government debt, which subjects SA to the risk of investor sentiment. Deteriorating domestic growth and interest rate increases in developed economies can accelerate outflows and impact SOEs severely.
The Minister has his work cut-out for him on Budget day, 20 February 2019. He must address various issues, some of them in direct competition, and whilst doing that he cannot really afford to increase the already heavy burden on the taxpayer. Not only for that reason, but also as it may not at this juncture be the right and popular thing to do. However, the Minister in conjunction with the teams at National Treasury, SARS and the DTI (to some extent), are capable of building part of the puzzle on Budget Day to put South Africa on a higher growth trajectory.
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