Pay cuts but fiscal position remains tight
• Finance minister Mboweni takes a tough line on reducing spending including on the state’s wage bill but debt levels are set to continue rising
Finance minister Tito Mboweni’s Budget Review paints a grim picture, revealing a shrinking envelope of money to run the country as SA continues to contend with poor growth and declining revenues.
Disappointing revenues, alongside continued spending pressure to support struggling state-owned entities (SOEs), means debt is not projected to stabilise over the coming three years — despite expenditure cuts Mboweni announced amounting to R261bn, including a cut of R160bn to the state’s wage bill.
However, in the face of the declining tax take and poor growth the budget did not raise taxes, notably avoiding a VAT hike, which some analysts had argued was inevitable.
“It shows the difficult position we are in, and I think we need to wake up to it,” Mboweni told journalists before delivering his budget speech in parliament.
The tight line he walked was, however, welcomed by analysts, even though the proposed savings cannot be achieved without buy-in from publicsector unions.
With economic growth now expected to average 1% over the coming three years, the revenue shortfall has come in at R63.3bn.
The consolidated budget deficit, which factors in cash balances held by certain social security funds, provinces and public entities, will come in at about 6.3% of GDP for 2019/2020, driven by poorer nominal GDP outcomes and the poorer tax take.
The budget deficit for the 2020/2021 year rises to 6.8% and is expected to be 6.2% in 2021/2022 before declining to 5.7% in 2022/2023.
The state’s debt level — an important metric that has been flagged by credit ratings agencies, including Moody’s Investors Service, the last agency that rates SA government debt at investment grade — is not expected to stabilise in the coming years.
The government’s debt-toGDP ratio will reach 61.6% during 2019/2020 before rising to 65.6% in 2020/2021, 69.1% in 2021/2022 and 71.6% in 2022/2023. These levels show a steady creep up from the figures announced in the medium-term budget policy statement, in which the Treasury predicted that the government’s debt-toGDP ratio would reach 60.8% in 2019/2020; 64.9% in 2020/ 2021 and 68.5% in 2021/2022, before reaching 71.3% in 2022/ 2023.
As a first step to halting the fiscal deterioration, Mboweni announced a cut to spending in the order of R260bn — a large part of which must come from the public-sector wage bill. According to the Treasury, cuts to the wage bill of R160bn can be achieved through a combination of changes to the cost-of-living adjustments, pay progression and other benefits.
CLEANING HOUSE
In total, government spending — excluding interest paid on debt — is set to decrease in real terms by an average of 0.4%.
Mboweni emphasised, however, that despite spending cuts in real terms this was not an austerity budget.
“We are not at a point of austerity. We are at a point of cleaning up our house. We are still spending, but not at the rate we wanted to be.”
The poor growth outlook and repeated poor performance of tax revenues did, however, see the state hold off on large tax hikes. Analysts had predicted the state could increase VAT to 16% given its financial difficulties. Instead, the state gave taxpayers relief by adjusting for increases in inflation — forgoing revenue collection of R14bn.
But analysts have argued that, given that the budget does make an effort to address the publicsector wage bill, which consumes close to 35% of government spending, as well as providing tax relief to support economic growth, it can be read as a good outcome under the circumstances.
“It is exactly what they should be doing,” said Investec’s head of SA investments Nazmeera Moola. But it was premised on wage discussions with unions being successful, she said, which is a “risky” strategy.
“They are heavily reliant on this massive cut to the wage bill this year, which there doesn’t seem to have been much discussion about,” said Moola.
Public unions have come out against any efforts to rein in wages, but Mboweni was confident that during discussions with labour, the state and unions will “find each other”.
But Treasury officials warned that the state has to try to achieve the wage savings. The alternative will be successive increases in the budget deficit, which could rise to 7.5% of GDP next year.
‘IT SHOWS THE DIFFICULT POSITION WE ARE IN, AND I THINK WE NEED TO WAKE UP TO IT’