South Africa’s budget will reverse some of the fiscal deterioration seen in 2017, however, the need to fund expenditure measures announced in recent months means the consolidation will be relatively modest.<\/p>\n
This is according to a statement<\/a> <\/strong>released by credit ratings agency Fitch on Friday (23 February), which said that it\u00a0remains to be seen how fiscal policy will evolve under president Ramaphosa.<\/p>\n “The budget signals a commitment to consolidation that appeared to be waning last October,” it said.<\/p>\n “The improved forecasts relative to the MTBPS are to be achieved despite significant new expenditures, notably on free higher education for large segments of the population, which will cost R12 billion in 2018\/19 and R25 billion in 2019\/20.<\/p>\n “We also think the government is committed to its expenditure ceiling, which is an important anchor for fiscal policy,” Fitch said.<\/p>\n “The budget estimates that the ceiling will be breached in 2017\/18 by a small amount, but the government has marginally lowered ceilings for subsequent years and did not use a provision that would have allowed an upward adjustment for fully funded major policy changes, which could have been applied to the tertiary education initiative.”<\/p>\n Nevertheless, these fiscal targets are subject to substantial risks Fitch said.<\/p>\n Eskom<\/strong><\/p>\n “The largest risk stems from state-owned enterprises – notably the electricity company Eskom, whose medium-term finances are under pressure from weak demand growth and the electricity regulator’s refusal to grant more substantial tariff increases,” Fitch said.<\/p>\n “The government does not foresee further capital injections for Eskom, and pointed to a number of potential measures, including private-sector participation, to improve its finances.<\/p>\n “But this approach will face significant political hurdles,” it said.<\/p>\n In an interview with Bloomberg TV<\/a><\/strong> on Thursday (22 February), finance minister Malusi Gigaba said that newly-elected president Cyril Ramaphosa had a big part to play in reforming\u00a0state-owned enterprises and staving off a credit downgrade.<\/p>\n “He (Ramaphosa) announced that he would personally take charge of structural reforms across government’s state-owned enterprises, and provide direction on structural reforms across to economy – all of which will do just enough to not only stave off a Moody’s downgrade, but improve the outlook of the other ratings agencies,” Gigaba said.<\/p>\n Wages<\/strong><\/p>\n “Public-sector wage negotiations ahead of the expiry of the current three-year agreement could put pressure on expenditure,” Fitch said.<\/p>\n According to the OECD’s latest report<\/a> <\/strong>on South Africa,\u00a0\u00a0government\u2019s\u00a0spending structure is heavily skewed by a large\u00a0wage bill, accounting for 35% of the total GDP compared to\u00a0an average of 14% in other emerging markets.<\/p>\n Speaking at a media roundtable ahead of the budget, Gina Schoeman, chief economist for South Africa at Citi, said reducing spending on public sector wages would not immediately resolve the state\u2019s financial woes, reported the Mail & Guardian<\/a><\/strong>.<\/p>\n “It will however provide an important political message about the continued compensation of employees, and the state\u2019s commitment towards budget consolidation,” she said.<\/p>\n Schoeman calculated that if public servants\u2019 salaries had been adjusted by 6% in 2016, rather than 7.5%, the savings would be about R7.8 billion or 0.2% of GDP.<\/p>\n Free education<\/strong><\/p>\n “While the budget projects free tertiary education to be fully funded by the VAT increase and other revenue measures, costs may rise as the impact on student numbers is highly uncertain,” Fitch said.<\/p>\n In a break down of Gigaba’s 2018 budget, chief investment strategist at Absa, Craig Pheiffer, said that it was not one new tax but rather a\u00a0combination of factors which Gigaba would try and use to see free education come to fruition in South Africa.<\/p>\n “Together with expenditure reduction of R85 billion and greater efficiency of government, the minister was able to announce a total of R57 billion set aside for fee-free higher education of the next three years,” said Pheiffer.<\/p>\n “First year students with a family income of less than R350,000 per annum will be fully funded for their studies in 2018, and this will be rolled out to second and third year students over the ensuing years.<\/p>\n “It was always questionable whether Government could accommodate this unplanned expenditure, but the combination of tax hikes and expenditure reductions have made this a reality<\/strong>. Another positive development is that the contingency reserve has been ratcheted up to R26 billion over the next three years.<\/p>\n “The introduction of the tertiary educational expense is the chief reason why the pace of fiscal consolidation is not as fast as it potentially could have been,” he said.<\/p>\n NHI<\/strong><\/p>\n “The planned introduction of National Health Insurance also presents medium-term fiscal risks,” Fitch said.<\/p>\n Despite concerns that medical-aid holders would lose out on their tax rebates after this year’s budget, these remain unchanged, with a rebate of R310 per individual contributing member.<\/p>\n This amount was capped to start raising money for the National Health Insurance programme, Treasury said.<\/p>\n Trouble with targets<\/strong><\/p>\n “There is also some uncertainty about the ability to reach targets for expenditure reduction, although the relatively tight budgeting system moderates this risk,” Fitch said.<\/p>\n While a number of analysts have praised this year’s budget – especially stricter measures like the increase in VAT rate – nearly all of them agreed that it remains to be seen whether the austerity targets will actually be met.<\/p>\n
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