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Budget preview: three issues that need to be addressed

14 February 2019 Nazmeera Moola, Deputy MD, Investec Asset Management

The Medium-Term Budget Policy Statement (MTBPS) last year, much like the MTBPS in 2017, reflected the government’s inability to make difficult decisions in the wake of deteriorating economic conditions. The expectation thereafter was that with a new Minister of Finance in Tito Mboweni we would finally see those tough decisions being made in the February 2019 budget. Since then there has been speculation whether the Minister would stay and questions around his relationships within National Treasury, which are cause for concern. We are therefore concerned whether this Budget will provide the needed clarity on the right but difficult choices we need.

Against this backdrop, these are the three key issues that we would need him to address:

1. Narrowing of the budget deficit

The general expectation is that the consolidated budget deficit will narrow from a projection of 4.2% for the fiscal year starting 1 April 2019 to below 4%. Unfortunately, the December revenue data showed disappointing collection across all three major sources, particularly personal and corporate income tax. In addition, there is very little room to raise taxes. After a number of years of tax increases, more recent hikes in tax rates have led to much lower than expected increases in tax collection, as the economy is under such strain.

With higher revenues therefore not the solution, we need to see cuts in expenditure. In 2018, the government resorted to cutting capital expenditure budgets. Therefore, any dramatic spending cuts can only be done through job cuts – and that looks very unlikely in an election year.

2. Eskom

President Cyril Ramaphosa made promises in his State of the Nation Address (SONA) around support for Eskom. We not only need to see details around the quantum of that support in the Budget, but more importantly, the manner in which it is linked to a general restructure of Eskom. If all we see is a bailout, it would be the worst possible outcome. Moody’s has already stated that any debt relief for Eskom from the government without immediate cost cuts at the utility would be credit negative. Since Moody’s is the only investment grade rating South Africa has left, retaining their confidence is key.

As Ramaphosa stated in SONA, Eskom needs to cut operating expenditure. In practice, it means that Eskom needs to cut jobs. Most of the studies we have seen suggest that about a third of the work force is not required. Cutting jobs in the current economic climate is difficult, but necessary. Treasury will need to ensure that any support for Eskom is explicitly linked to the power utility achieving cost containment. That is vital.

3. National Health Insurance (NHI)

Ramaphosa also noted in his SONA that the NHI Bill would be tabled over the coming months. This is in line with stated ANC policy. While the costs to implement NHI in full would swamp the budget, we expect that the Bill will outline the principles for a gradual implementation over a long period of time. As the success of the NHI requires a vast improvement in the public health system, we would also hope that implementation is dependent on measured progress in the public system.

The Budget will provide a good guide on the pace of implementation as Treasury will need to pencil in cost estimates for NHI. We expect the cost estimates to be limited, in line with this gradual implementation.

Between politics & economics

Over the last decade we have seen a persistent decline in South Africa’s fiscal metrics. A range of poor policies and decisions by the Zuma government, wide-spread corruption and poor growth are the cause of our current problems. Around three years ago, the pace of this deterioration accelerated.

The government should be making some difficult decisions around staff numbers. They need to prioritise service delivery and cost cutting. It is possible to do both, given the vast inefficiencies in the public service; for example there is an average 10% absenteeism rate amongst teachers. Unfortunately, the dysfunctional politics of the ANC coupled with the realities of an election year will make all this difficult. We expect only the most difficult decisions to be made. Anything else will be delayed.

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