Finance Minister Tito Mboweni has dished up a substantial serving of grim fiscal news, with a side serving of burgeoning debt sprinkled with low economic growth, garnished by plans to cut spending. And, while the dish has been prepared using a complex recipe, it’s was unlikely, and did not please the palate of all.
Mboweni started off his medium term budget speech on Wednesday with a number of disclaimers, which is understandable given the hype in the weeks preceding the event.
Recently released employment stats showed an increase in unemployment figures to 29.1%, the highest level in 11 years. The economy is projected to grow at a paltry 0.6% this year, and tax revenue has been disappointing.
Amidst it all, earlier this year, the Finance Minister leap-frogged normal government protocol in his release of economic discussion paper “Economic transformation, inclusive growth, and competitiveness: Towards an Economic Strategy for South Africa” that raised the ire and drew strong backlash of many in the ruling party and its alliance partners.
So, much was riding on what would be said during the speech:
Ratings agencies were looking for an indication of structural reform; defeated job-seekers were looking for hope on the employment front; opinion leaders were looking for clarity stemming from the economic discussion document; and the trade unions were keen to defend government wage earners’ salaries amidst the ever-rising pressure to drive down the government wage bill.
In response, Mboweni emphasised that the purpose of Wednesday’s medium term budget was “to open up the debate before the (actual) Budget is finalised.”
But, given the almost impossible tightrope that the finance minister is currently walking, the debates are likely to be broad in rhetoric but limited in implementation.
The debt and tax story
First up in the litany of bad news was a grim reality check around debt. South Africa’s debt to GDP ratio was originally estimated at 55.6% for 2019/20 but has now climbed to 60.8% of GDP.
Importantly, gross debt is not projected to stabilise over the medium term, observes Investec economist Annabel Bishop: it will rise to 71% of GDP by 2022/23, and to 81% by 2027/28 on the current trajectory.
The debt issue is compounded by tax revenue collection that has been lower than expected. We now expect to collect R1.37tn this year, which is 4% lower than expected.
“Our problem is that we spend more than we earn. It is as simple as that,” said Mboweni.
To address this, the government has identified spending reductions of R21bn and R29bn in the next two fiscal years respectively. But still, there’s a shortfall: “we will need to find additional measures … [of] about R50 billion a year,” said the minister.
Four main areas in which the government hopes to achieve this:
– Curtailing the government wage bill
– Implementing reforms in state- owned companies
– Addressing executive remuneration and benefits
– Helping to shore up fiscal leakages.
Restricting the wage bill
Wednesday’s budget review includes the details of an extensive wage analysis conducted on public servants. It showed that 29 000 public servants, and members of various local, provincial and national government departments, each earned more than R1mn last year.
“After adjusting for inflation, the average government wage has risen by 66% in the last ten years,” said Mboweni.
The minister called for “robust discussions” in the relevant bargaining structures to achieve a “sustainable arrangement.” He is likely, however, to face stiff opposition from the trade unions.
In a statement released a few hours after the speech, the Congress of South African Trade Unions (Cosatu) said that it “rejects Treasury’s continuous attacks on the rights of nurses, teachers, police and correctional service officers, cleaners, doctors etc [sic] to earn a living wage.”
The union further contested that many of the wage bill stats presented in the budget are distorted. “The National Treasury complains that the wage bill has increased, yet it fails to mention that this was done in part to address apartheid wage gaps.
“On the wage bill, the Minister is either fundamentally dishonest or innocently delusional.” COSATU
Action on crumbling SOE’s
In what Mboweni described as possibly the most important piece of news of the day, he declared that “we cannot continue to throw money at Eskom.”
Somewhat disingenuously, he simultaneously outlined that painful budget rearrangements had been made to make more cash available to the ailing power utility (R26bn in the current fiscal year, and R10bn and R33bn will be made in the two following). But, he said, a critical change would be implemented going forward:
“New cash flow support will no longer be [in the form of] equity but will be in the form of loans. Eskom is a business and should be run that way.”
The Minister, possibly as part of the government’s urgent need to increase tax revenue, highlighted the need for South Africans to pay their e-Tolls.
The government is considering several avenues to resolve the e-Toll “impasse.” This will ultimately be up to the Ministers of Finance and Transport in consultation with the Premier of Gauteng and his Executive council, said Mboweni.
But in Gauteng, where the DA-ANC leadership race is so closely contested, the e-Toll saga remains a political hot potato. It remains to be seen how hard either side will push, and whether political favour or the revenue imperative will emerge as top priority.
The minister was openly critical of South African Airways’ inability to finance its debts and find a profitable trajectory. He welcomed talks around privatisation.
“How long are we going to be on this flight path? Forever? I think not!” he said. But a closer inspection of this year’s budget allocations shows that R5.5bn has been put aside to help the airline, and that the government will likely need to honour a further R9.2bn in government guaranteed unpaid debts.
Cutting the Fat
In perhaps the most popular announcement of the day, Mboweni announced that the following changes will come into effect (as already approved by President Ramaphosa) on 1 December:
- For the foreseeable future, Cabinet, Premiers and MECs’ salaries will be frozen at current levels
- The cost of official cars will be capped at R800 000, inclusive of VAT
- Cell phone bills claimable from the state will now be capped. Further detail on what that cap would be were not expanded upon.
- All domestic travel by government employees will, going forward, be on economy class
- Mboweni also announced that he would determine the “appropriate use of subsistence and travel for all arms of the state”
Enhancing Government efficiencies
Lastly, Mboweni made some noises that appeared to be aimed at assuaging the ratings agencies, highlighting spending priorities on infrastructure and driving government efficiencies.
He also emphasised efforts to clamp down on tax evasion, illicit cross-border cash outflows, and smoothing the path for foreigners to do business in South Africa.
But several analysts believe that this will not be enough to appease Moody’s, which is the only major ratings agency that has kept South Africa above sub-investment standard and is expected to release a revised outlook later this week.
“We expect Moody’s to change the outlook on its Baa3 rating of South Africa to negative from stable on 1 November 2019, followed by a downgrade in 2020,” said Isaah Mhlanga, executive chief economist at Alexander Forbes, following the speech.
But, while a downgrade will certainly signal capital outflows from a country in desperate need of foreign investment, it may not be the long-term disaster that some make it out to be.
“Both the bond and currency markets appear to have already priced in a potential negative credit rating action,” said Mhlanga. “
Should Moody’s take [this decision], markets will likely recover over the next 12 months, depending on the speed of implementation of growth-boosting economic reforms.”
So, in the end, it really comes down to whether Mboweni can put into practice what he called for in his Wednesday speech:
“Rock the boat! Shake the baobab tree! Do the unusual, disrupt the comfort zones. Get things moving!”
