Finance Minister Malusi Gigaba confirmed the worst in his maiden Medium-Term Budget Policy Statement (MTBPS), revealing serious fiscal slippages amid bail-outs of State-owned companies (SOCs), a worryingly sharp deterioration in revenue collections, a material downward revision to the country’s growth outlook and a massive spike in outlook for the country’s peak debt and debt-servicing costs.
The consolidated Budget deficit would widen to 4.3% of gross domestic product (GDP) in 2017/18, against the 2017 Budget target of 3.1% of GDP, announced by Gigaba’s highly respected predecessor, Pravin Gordhan, whose removal from Cabinet in March precipitated a downgrade in South Africa’s credit rating to junk.
The expenditure ceiling, which excludes interest payments, could be breached by R3.9-billion in the current year, mainly as a result of government’s decision to direct R13.7-billion towards the recapitalisation of South African Airways and the South African Post Office.
However, Gigaba said government would dispose of assets, including its Telkom shares, to offset the appropriations during the current year and avoid breaching the expenditure ceiling. The National Treasury values government’s 39% holding at between R14-billion and R20-billion.
“Government is disposing of a portion of its Telkom shares to avoid a breach, with an option to buy them back,” he said, indicating that additional assets would be identified by March for possible disposal. These would be both core and noncore State assets, where the injection of private equity or expertise would release value and enable government to avoid breaching its expenditure ceiling.
The National Treasury also cautioned that several other SOCs, including Denel, South African Express and the South African Broadcasting Corporation faced liquidity shortfalls and would “likely require some form of intervention from government”.
No mention was made about possible additional support for Eskom, which had submitted an application for a 19.9% electricity tariff hike for 2018/19, which was likely to be heavily contested by stakeholders during upcoming public hearings to be hosted by the National Energy Regulator of South Africa in October and November.
However, Gigaba said that the state of the utility was of grave concern, adding that it was too important to the economy to be allowed to fail.
“National Treasury will work closely with the Department of Public Enterprises to strengthen governance and financial management at Eskom,” he said, adding that a new board would be appointed by the end of November.
Gross national debt was now projected to reach over 61% of GDP by 2022, representing a major decoupling from the outlook provided in February by Gordhan, who had indicated that government’s fiscal consolidation effort would ensure that debt would peak at around 50% of GDP.
Total gross loan debt was expected to rise from R2.5-trillion, or 54.2% of GDP this year, to R3.4-trillion in 2021/21, or 59.7% of GDP.
As a consequence, debt-servicing costs would be the fastest-growing category of expenditure, rising to nearly 15% of the main Budget by 2020/22, crowding out social and economic spending.
Over the medium term, expenditure would grow by a yearly average of 7.3%, from R1.6-trillion in 2017/18, to R1.9-trillion in 2020/21. However, relative to the 2017 Budget projections, debt-service costs would be R1-billion higher in 2017/18, R2.4-billion higher in 2018/19 and R6-billion higher in 2019/20. Debt-service costs were estimated to rise from R163.3-billion this year to R223.4-billlion in 2010/21.
The other uncomfortable news delivered by Gigaba was the a “sharp deterioration” in revenue collections, with tax revenue now projected to fall short of the 2017 Budget estimate by R50.8-billion in the current year, the largest under-collection since the 2009 recession. The revenue forecast was revised to R1.21-trillion from R1.27-trillion in February.
The largest shortfall against the 2017 Budget estimate was in customs duties, which slowed in tandem with falling import growth. Personal income tax, value-added tax and corporate income tax also performed below projections. These shortfalls were offset by higher-than-projected dividend withholding taxes amounting to R5.4-billion, but the MTBPS cautioned that the “windfall” might have resulted from artificial declarations of dividend payments before the effective date to avoid the higher tax rate introduced in the 2017 Budget.
Making the outlook even more problematic, though, was the downward revision in the 2017 growth forecast to 0.7% from the 1.3% forecast in February. Economic growth is expected to recover slowly, reaching only 1.9% in 2020.
This weak growth prognosis came amid improving global economic conditions and Gigaba argued that, to take advantage of these favourable external conditions, South Africa needed to restore confidence, which he described as the “cheapest form of stimulus”.
However, he spoke against a backdrop of a severe breakdown in trust between government and its social partners in business and labour following President Jacob Zuma’s March Cabinet reshuffle and in light of ongoing revelations of corruption. There is also deep unhappiness over so-called ‘State capture’, whereby a politically connected elite has sought to extract private gain from State resources, including those at the large SOCs, such as Eskom.
Confirmation of further fiscal slippage and a surge in the debt burden is also likely to place the country’s credit rating under further stress, with two of the ratings agencies due to pronounce on South Africa’s position in late November.
Gigaba saw the remedy in accelerating structural reform, saying: “we must shake off complacency, accept the urgent challenges we have and increase the pace and scale of the implementation of the reforms”.
On the fiscal front, he said government was deliberating on the best fiscal strategy to ensure the programme of measured fiscal consolidation is not derailed, but warned, “None of the options are free of pain”.
Government aimed to resolve the setback in fiscal consolidation by paring down the contingency reserve by R16-billion over the coming three years.
In addition, Gigaba said that he would use the 2018 Budget to announce plans for cutting the fiscal deficit, which he said would involve a combination of expenditure cuts and revenue increases.
“Following several years of expenditure restraint, further Budget cuts will involve hard choices and difficult compromises.”