Budget 2019 Analysis: ‘At some point the trade-off asserts itself’

By Thalia Holmes

Brandishing his “bitter aloe”, quoting Oliver Twist and everything in the “good book” from Zachariah to Isaiah, Finance Minister Tito Mboweni did his best to introduce some light-heartedness to his maiden Budget Speech on Wednesday. But underlying it all was the grim reality of a lawmaker facing slow economic growth, high levels of national debt, a litany of failing state-owned companies, fierce trade unions and a disgruntled electorate angered by low levels of service delivery and the legacies of corrupt administration.   

The tax debacle

Add to this another key disappointment: lower-than expected tax revenue. The hike in Value-Added Tax from 14% to 15% introduced in last year’s budget was initially projected to bring an additional R22.9 billion in to the fiscus over the year. This golden goose was what treasury had hoped would slightly ease fiscal pressure and allow funds to appease the voting public in key service delivery areas as elections fast approach.

However, the government now expects tax collection to fall short by almost R43 billion this year, up from the R27 billion it predicted six months ago. 

“To summarise,” said the Minister in his budget speech: “In this coming year, we expect revenues of R1.58-trillion and spending of R1.83trillion. That means we will spend R243 billion more than we earn. Put another way, we are borrowing about R1.2-billion a day, assuming that we don’t borrow money on the weekend.”

A silver lining

Mboweni explained that “approximately half of the increase in the shortfall since October is due to higher than expected VAT refunds.” In other words, a large portion of the money that came in from the VAT increase had to be re-disbursed to the public. “This lowers revenue collection for the year, but puts money back into the economy,” the minister said, reflecting the silver lining in the situation. However, it also reflects the administrative malfeasance that has taken place at the revenue service over the past several years.

READ: Health sector scoops over R700 billion of 2019 Budget

According to Michael Sachs, the former head of the budget office at National Treasury, the level of tax revenue received by the government depends on three main factors: tax administration, tax policy and underlying economic forces. “It’s very difficult to disentangle the three,” he said.

This year, the Finance Minister has attacked the only area of tax that he could foreseeably hike without causing serious political repercussions in an election year: sin taxes have been raised – for everything ranging from a can of beer, which sees a 12 cent increase in tax, to a bottle of whiskey, which will see a whopping R4.45 increase. Smokers will pay an additional R1.14 per pack of 20 cigarettes. And then there’s the fuel levy: motorists have been hit by a hike in the cost of petrol by 29 cents and diesel by 30 cents per litre.

The government has also slipped in a subtle hit for personal income tax payers, by making no inflationary adjustments for personal income tax rates. In other words, if your salary increases with inflation this year, you’ll be paying more tax than you did last year.

Carrots for the voters

Treasury revised the GDP growth outlook for the next year to 1.5%. It is expected to reach 2% in 2020, reflecting “weaker global growth, low private sector investment and reduction in government spending,” surmises Isaah Mhlanga, Executive Chief Economist at Alexander Forbes.  

Treading the impossibly tight line between the fiscal discipline required in this environment and the political pressure to appease the electorate in an election year, Mboweni managed to dangle a few carrots out to the voters. The most significant baseline adjustments were made to target the pain points of education, housing, health and infrastructure.

  • Over R30 billion is earmarked to build new schools and maintain schooling infrastructure, with an additional R2.8 billion to replace pit latrines at over 2,400 schools.
  • Over R111.2 billion is set aside over the medium term “to ensure that 2.8 million deserving students from poor and working-class families obtain their qualifications at universities and TVET (Technical and Vocational Education and Training) colleges,” said the minister.

“Our children are our future,” he said. “Most of the spending goes to education, and we will strengthen early childhood development and support higher education for the most deserving.”

While the minister made lip service in his speech to land reform, the detailed budget shows that the “Agricultural land holding account: land reform” will see a R500 million baseline reduction in the next two fiscal years. However, the budget notes that: “despite the baseline reduction in 2020/21 and 2021/22, R18.4-billion is allocated to accelerate land reform over the medium term. This will help finalise more than 1,700 restitution claims and acquire more than 325,000 hectares of land for landless South Africans.”

Social grants will see small increases, that in some cases may be lower than inflation, depending on how well it is contained in the upcoming year.

The South African National Roads Agency is allocated an additional R3.5-billion over the next three years specifically to improve non-toll roads. The minister highlighted a desire to put to bed the policy uncertainty surrounding e-tolls and the domino effect this is currently having on investment, where otherwise keen investors are holding back due to uncertainty around e-toll issues. “In October, I emphasised the importance of the user pay principle,” he said. “It is a principle that we should uphold. In any future negotiations, this should be borne in mind.”

SOE woes

The most highly-anticipated question of the day, was exactly how the government plans to deal with ailing state utility, Eskom – which is currently R416-billion in debt — and the other struggling SOEs that have requested bailouts. Mboweni spelled out a hard-tack approach that had many in the parliamentary audience cheering.

READ: Mboweni boosts budget for Education

“The SOEs pose very serious risks to the fiscal framework,” he said. “Funding requests from SAA, SABC, Denel, Eskom and other financially challenged state-owned enterprises have increased, with several requesting state support just to continue operating. Isn’t it about time the country asks the question: do we still need these enterprises? If we do, can we manage them better? If we don’t need them, what should we do?”

The minister underscored plans for the subdivision of Eskom into three independent components. “This will set the electricity market on a new trajectory, and allow for more competition, transparency and a focused funding model,” said the minister. “Pouring money directly into Eskom in its current form is like pouring water into a sieve.”

The government will allocate R23 billion a year to financially support Eskom in its reconfiguration.

The minister emphasised, however, that the national government is not taking on Eskom’s debt. “Eskom took on the debt. It must ultimately repay it.”

A contingency reserve of about R13 billion has been set aside for the support of other SOEs.

Debt, debt and more debt

The background against which the minister presented this year’s budget reflects the country’s struggles to keep the wheels turning amid a growing slog of debt.

The budget deficit – the amount of debt which the country generates in a single given year – is expected to climb to 4.2% this year (0.6% higher than projected in last year’s budget) and then to 4.5% in the following one. It is expected to moderate to 4% by 2021/22.

However, Sachs said that the biggest concern is not the size of the deficit itself; it’s the fact that there is no foreseeable end to it. In his estimations, the budget deficit will remain at around 4% “forever” – or at least, until some significant policy, structural and social reforms come underway.

READ: Opposition: Mboweni’s budget speech ‘Uninspiring’

This makes South Africa’s investment case a difficult one, and is one of the contributing factors to our negative credit ratings. Whether today’s budget will be enough to keep Moody’s from joining the other ratings agencies in awarding South Africa junk status in the next few months, remains to be seen.

The debt-to-GDP ratio is another factor on which ratings agencies keep close watch. Once again, the treasury has projected this to stabilise slightly higher than expected over the medium term, at 60% of GDP in FY2023/24, up from 59.6%. But Sachs warns that medium-term projections such as these are notoriously inaccurate and therefore don’t hold much weight. “The real issue,” said Sachs, “is that the debt keeps going up.”

In his opinion, the tough position of the Finance Minister means that in the end, something’s got to give.

“Ultimately these things feed back onto each other,” said Sachs. “At some point the trade-off asserts itself.”  

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