Treasury pushes for budget cuts to fight spiraling debt

South Africa is seeking to cut government budgets as it moves to contain debt after promising billions of rands to rescue its power utility and a weak economy damps tax collection.

The National Treasury has asked departments to prepare proposals on how to reduce expenditure in a way that has the least impact on service delivery.

It’s seeking cuts of 5% for 2020-21, and 6% and 7% for the next two years, the Treasury said. That could be as much as R300 billion ($19.7 billion) over three years.

This could be a first step in containing South Africa’s budget deficit, which is projected by Fitch Ratings Ltd. to overshoot the government’s forecast by almost 2 percentage points this year. That’s after the Treasury pledged an additional R59 billion bailout for the power utility Eskom Holdings SOC Ltd.

Spending cuts of that magnitude could placate credit ratings companies such as Moody’s Investors Service, the last major firm to assess South Africa’s debt at investment grade, and reduce the need for tax hikes.

Moody’s communication desk said by email it could not immediately respond to queries about this.

Finance minister Tito Mboweni said in February the government will reduce its wage bill by about R25 billion over three years.

This would be done by encouraging early retirement. State workers’ salaries account for about 35% of the R1.8 trillion budget for the fiscal year that ends in March.

Mboweni will present the mid-term budget statement with the spending framework for the next three years in October.

Johannesburg-based Business Day newspaper reported on the spending cuts earlier on Thursday.

Jackson Mthembu, the minister in the presidency, told reporters the Treasury hasn’t briefed cabinet on proposed spending cuts, adding that Mboweni would soon present an “holistic paper” on the economy.

President Cyril Ramaphosa is due to speak in Parliament later on Thursday on the economic challenges facing the economy.

The government’s plan to give Eskom R128 billion in assistance over three years will add to state liabilities and widen the fiscal shortfall.

Fitch Ratings estimates the budget gap may climb to 6.3% of gross domestic product this year, and government debt to 68% of GDP in two years.

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Treasury pushes for budget cuts to fight spiraling debt