Finance Minister Malusi Gigaba’s maiden budget performance in Parliament on Wednesday afternoon did not leave any room for celebration, and government’s finances and prospects over the next three years do not present a rosy picture.
Low economic growth (down to an expected 0.7% this year) has resulted in skyrocketing risks, with the Medium-term Budget Policy Statement talking about “SA confronting a low-growth trap”.
The projected revenue shortfall was higher than expected at R50.8 billion (for the 2017/18 budget), resulting in an increasing budget deficit and a substantial debt risk hike. At about 15%, debt repayment costs are already the biggest budget item.
The biggest disappointment of Gigaba’s speech was the lack of real new initiatives or measures to stimulate growth or cut government expenses. The plans sound very familiar, and phrases like “an interministerial committee will look at that”, “announcements will be made later (in February)” or “some programmes will need to be eliminated, or funding reduced” are downright unacceptable.
The mini budget is quite frank about government’s predicament, but there is no mention of where the money for shortfalls will really come from, except maybe “the selling of assets” and tax increases. Gigaba seems to be “referring” and postponing all the contentious issues – from public service wage hikes to nuclear power and the water crisis in the Western Cape.
There was no mention of tax hikes or plans for new taxes, although South Africans can brace themselves for increases next February. The mini budget said though that there is “little space for tax increases in the current environment”.
There is still an attempt at reassurance, with statements like “government remains committed to a path of fiscal consolidation”, “it will maintain the expenditure ceiling” and “a presidential task team will develop proposals to restore fiscal sustainability”.
But then the usual suspects like radical economic transformation, contributions to transformation and inclusive growth and a redistributive and progressive budget are also still there.
One must admit that Gigaba was in a tight spot, with revenue resources under pressure and mounting spending needs. But then again, what do you expect when well-intentioned warnings are simply disregarded by government?
These are the highlights of the budget speech:
South Africans will probably pay more taxes from next year (detail in next February’s budget), but no details were given. The mini budget suggests the possibility of a “profound shift in the relationship between economic growth and tax collection” in that “tax buoyancy – the expansion of revenue associated with economic growth, has fallen significantly in the past two years”.
Whether that means less effective tax collection or “less willing” taxpayers, is not clear. Over the three years to 2019/20 the projected tax shortfall will be a massive R209 billion.
Gigaba did talk about “noting a slippage in tax compliance” in his speech. “I am engaging with the commissioner of SARS (the South African Revenue Service) on the recommendations made in August by the tax ombud, and to take concrete and practical steps to help improve taxpayer confidence (on delays in refunds),” he said.
Economic growth has slowed and the February projection of 1.3% has been lowered to 0.7%, still higher than the 0.5% recently projected by the International Monetary Fund. Economic growth is expected to recover slowly, reaching 1.9% in 2020.
The weaker growth outlook reflects a continued deterioration in business and consumer confidence that has gathered pace since 2014, the mini budget mentions. However, the international economic outlook is improving.
Risks to fiscal framework
The consolidated budget deficit for 2017/18 is expected to be 4.3% of GDP, compared with a 2017 Budget estimate of 3.1%. The main budget deficit, which determines government’s net borrowing requirement, will be 4.7% of GDP this year.
Additional risks to the framework include more financial demands from state-owned enterprises (SOEs), public service compensation pressures and new spending commitments, particularly in higher education. Government guarantees for SOEs have jumped to R445 billion.
Gross national debt is projected to reach over 60% of GDP by 2022, with debt service costs reaching 15% of main budget revenue by 2020/21. Debt service costs (R163.3 billion this year, rising to R223.4 billion by 2020/21) are the biggest single item on the budget, and at 11% per year the fastest rising category. The gross debt-to-GDP outlook has worsened from February’s projected 51.9% of GDP by 2022 to the current revised figure of 60.8%.
Risks of spending on SOEs
Government’s total guarantees on SOE lending have jumped to R445 billion. Unprofitable state firms are putting huge pressure on the fiscus. Their average profitability fell from 7.5% in 2011/12 to just 0.2% in 2016/17.
That increased their risk premium – and thus debt costs – substantially. The recapitalisation of South African Airways (total of R10 billion) and the South African Post Office lifted the lid breach on the expenditure ceiling by R3.9bn. The guarantees are government’s major explicit contingent liabilities.
The fastest growing elements of spending are learning and culture (including post-school education and training) and health and community development, with growth rates of 7.6%, 7.5% and 7.9% respectively. It is stated that government is protecting expenditure that delivers services to low-income households. However, additional resources to support spending priorities are severely limited.
Furthermore, seven expenditure priorities for the medium-term expenditure framework period are mentioned:
- Job-creation and small business development;
- Youth development;
- Infrastructure expansion and maintenance;
- Land reform, smallholder farmer and agriculture development;
- Comprehensive social security, education and skills;
- An integrated plan to fight crime; and
- Advancing the national interest in the Southern African Development Community throughout Africa, and through participation in the BRICS (Brazil, Russia, India, China and South Africa) bloc and the Indian Ocean Rim Association.
Nothing is said about big projects like the nuclear energy new build plan or the national health insurance scheme. The only mention is that the latter will increase spending on health by 2025. Announcements will either be made later, or have been put on hold for the time being.