Finance Minister Nhlanhla Nene on Wednesday announced firm measures to check South Africa’s worsening debt outlook, warning that the country has reached an economic turning point.
The plan includes capping government spending and raising tax revenues, he said in the 2014 Medium-Term Budget Policy Statement (MTBPS), tabled at Parliament.
“In response to a worsening debt outlook, government proposes a fiscal package that reduces the expenditure ceiling and raises tax revenue over the next two years.”
The minister dismissed suggestions that he was tabling austerity measures as “an exaggeration”, and said in the Medium-Term Budget Policy Statement (MTBPS) that while spending ceilings were being lowered, the country’s budget would continue to grow in real terms.
“Government will spend R4.4 trillion over the next three years.”
Nene said GDP growth was now anticipated to be 1.4 percent this year (2014/15), almost half of the 2.7 percent forecast in February.
“While growth is expected to reach three percent in 2017, this is well below the country’s potential and has placed public finances under increasing pressure.
“Rising debt levels, if left unchecked, would absorb more and more of our spending,” he said.
On reducing spending, Nene said government would lower its 2014/15 budget spending ceiling by R25 billion over the next two years.
“Government proposes to reduce this ceiling by R10bn in 2015/16, and R15bn in 2016/17.”
On tax revenue, he signalled changes to incorporate the recommendations of the Davis Tax committee were on the cards for next year.
“Proposals will be introduced in the 2015 budget to generate additional revenue of at least R27bn over the next two years.”
Policy and administrative reforms — details of which would be spelled out in next year’s budget — would raise revenues by “at least R12bn in 2015/16, R15bn in 2016/17, and R17bn in 2017/18”.
Speaking to reporters on Wednesday, ahead of his speech to the National Assembly, Nene said increasing state revenue was part of plans to put public finances onto a sustainable footing, but declined to say whether he would raise personal income taxes come February.
Asked who would bear the brunt of belt-tightening, he answered “all of us”, but added that all efforts will be made to protect the poor and to keep funding priorities such as the infrastructure drive.
“What we need to balance is ensuring that our interventions do not have unintended consequences… of stifling the economy when we are dealing with a financial crisis situation.
“But also what we want to continue to do is to protect the poor and the vulnerable in this country… but at the same time making sure that we re-allocate our resources to the investment and the productive capacity of the country.”
The minister said South Africa faced a difficult economic environment.
“The consumption-led, debt-financed economic growth of recent years has reached its limits, and growth has slowed… weak economic performance has put a great deal of pressure on the fiscus, with revenue insufficient to cover expenditure.
“The budget deficit is high, debt levels have approached the limits of sustainability, and the economy is vulnerable to global volatility,” he said.
Nene noted that interest payments had grown rapidly in recent years, and now absorbed more than 10 percent of the national budget.
According to the MTBPS, the 2014/15 budget deficit now totals R153.2bn, or 4.1 percent of GDP
A table in the document shows South Africa’s total net loan debt is now R1.588 trillion.
On structural reforms over the next five years, Nene said these would include sending the public service “back to basics”.
This would see it focus on service delivery and sound financial management, as well as improving education against measurable targets, and better managing labour disputes.
Nene also announced a strict “deficit-neutral” approach to state-owned companies, including Eskom and South African Airways. He said these could no longer count on bail-outs from the state.
“Over the next two years, government will ensure that any capitalisation required does not widen the budget deficit.”
Government’s financial support for the electricity generator would take several forms, including “a direct allocation to the utility of at least R20bn, raised through the sale of non-strategic state assets”.
This would have no impact on the budget deficit.
Nene said government would also “restrain” growth in its own wage bill, and warned that if public-sector wage increases significantly outpaced inflation, service delivery would need to be curtailed.
“Either by reducing social spending or capital budgets, or by trimming staff members.”