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Budget review: Take the bitter with the sweet

21 February 2019 Reza Hendrickse, Portfolio Manager at PPS Investments

Former South African Reserve Bank Governor, Tito Mboweni knew that he would have a difficult task ahead of him when he was called on to fulfil the role of Finance Minister in 2018. It is therefore perhaps understandable that he literally turned to the Bible for guidance in preparation for this year’s Budget, making several references to scripture as he attempted to inspire and thread optimism throughout his speech.

Overall, it was a promising budget, which shows resolve in tackling some of our deep-seated issues. Spending priorities recognise the need for spending on infrastructure and investment as well as education, and away from the state wage bill. There are no quick fixes, and it will take time to see meaningful improvement, but the it has to begin with good intent and a sensible plan, both of which seem to be in place.

Growth outlook muted
Since the Medium-Term Budget Policy Statement (MTBPS) in October 2018, the growth backdrop has weakened slightly. While the growth expectation remains at 0.7% in 2018, the growth outlook is slightly more muted with 1.5% expected in 2019, rising to 2.1% in 2021.

At the time, the budget deficit was forecast at 4.3%. The revised estimate is roughly on par at 4.2%, but is forecast to widen to 4.5% in 2019/20 before coming down.

Tax revenue
Tax revenue was downwardly revised since the MTBPS due to higher than expected VAT refunds, but there is some comfort in the fact that SARS is in the process of reform and that the efficiency of revenue collection should improve going forward. There were no changes to the personal income tax brackets although the tax-free thresholds have been raised slightly. The usual excise duty increases on alcohol and tobacco will apply. Additional revenue measures are expected to generate R15 billion of revenue in 2019/20.

Government expenditure
As usual, the expenditure component of the budget was the main event this year, perhaps more so given the spotlight that has been cast on state-owned enterprises (SOE) in recent times. The expenditure ceiling has been revised upwards by R16 billion over the next three years, given provisional support for Eskom and the government’s Infrastructure Fund that has offset steps to lower baseline expenditure by R50 billion over the medium-term.

The Minister made it clear by stating categorically that national government will not be taking on Eskom’s debt. He likened placing money into Eskom to pouring “water into a sieve”, but noted that money is being set aside to support the enterprise in its reconfiguration into three independent units.

In terms of the fiscal framework, expenditure will exceed revenues by R243 billion this year, and the gross national debt is still expected to stabilise around 60% of GDP in 2034/24. Spending priorities over the medium-term acknowledge that the state wage bill is unsustainable, and compensation budgets are expected to reduce by R27 billion over the next three years. This will be initially achieved by allowing older public servants to retire early should they wish. Interestingly, the Minister reported that members of parliament will not be receiving salary increases this financial year, which should send a positive message to taxpayers.

The Minister also laid out plans for non-interest spending of R5.87 trillion over the next three years, mostly on education, but also on health and social development. He also detailed how the Budget aligned with the President’s five strategic tasks, aimed at accelerating growth, creating jobs, improving education and the lives of the poor, fighting corruption and strengthening the state in order to address the people’s needs.

 

 

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