The big budget issues Mboweni can’t ignore
We are in deep economic trouble, with ordinary people battling to make ends meet as they experience an income squeeze on top of tax increases and petrol price hikes.
And 9.6 million people do not have jobs, or have given up looking for work.
This means finance minister Tito Mboweni’s “mini-moon” is over and he faces a six-pack of challenges to be dealt with in his maiden medium-term budget policy statement (MTBPS).
President Cyril Ramaphosa’s “new path” of economic growth, employment and transformation lost momentum when the economy slipped into recession.
We expect the economic growth rate to be revised down to about 0.7% (2018), 1.9% (2019) and 2% (2020).
This is insufficient to sustain our public finances or provide employment to the 9.6 million people who do not have jobs, or who have given up looking for work.
The minister should present a credible plan to boost economic growth to at least 3% by announcing a package of structural reforms designed to increase private-sector investment.
This requires a fundamental change in economic policy aimed at, for example, increasing private-sector investment by:
● Exempting small businesses employing fewer than 250 employees from having to comply with restrictive labour laws, other than the basic conditions of employment;
● Removing the extension of bargaining council agreements to non-parties, who often cannot carry the cost of wage agreements imposed on them; and
● Scrapping reckless economic policy proposals such as the formation of state banks, land expropriation without compensation and nationalisation of the SA Reserve Bank.
We have a staggering national debt that is expected to stabilise at about R3.8 trillion or 53.2% of GDP in 2023-24.
There is likely to be significant “fiscal slippage” given the lower-than-expected economic growth, with the economy expected to grow at an average of about 1.5% over the medium term. Revenue is likely to be lower than expected given the recommendations of the independent panel on value-added tax, which may decrease revenue by about R18bn over the medium term.
Expenditure is likely to be higher than expected given the public sector wage agreement, which may increase expenditure by about R30bn over the medium term.
Debt-service costs of about R34bn will rise as a result of the increasing national debt over the medium term; and financial assistance will be required by zombie state-owned enterprises such as the R22bn in “bailouts” required by SA Airways. The R50bn that will be spent on the “economic stimulus and recovery plan” is expected to be funded by reprioritisation and is assumed to be “budget neutral” between 201819 and 2020-21.
We expect fiscal deficits to increase and national debt to stabilise at a level above R3.8trillion or 53.2% of GDP, some time after 2023-24. What this means is debt-service costs will skyrocket to about R280bn in 2023-24, a staggering R87bn more than we will spend on social grants in 2018-19.
The minister should hold the fiscal line by announcing a comprehensive spending review and presenting a credible plan to stabilise national debt at, or below, 50% of the GDP.
This would be aimed at reviewing the efficiency and composition of spending, future spending priorities and asset sales, with a view to:
● Selling off assets, including public entities, underutilised buildings, underutilised land parcels and liquid assets;
● Improving the composition of spending by funding investment in infrastructure to support economic growth; and
● Cutting the fiscal deficit to reduce national debt, and debt service costs between 2019-20 and 2021-22.
Public service wages will consume an average of 40% of tax revenue between 2019-20 and 2021-22. We could cut this through retrenchments, early retirements, severance packages, headcount freezes and wage freezes. A “wage freeze” in general government would save a total of R238bn between 2019-20 and 2021-22.
As a result of state capture, public trust has been shattered in many institutions in the “finance family”, not least the SA Revenue Service (Sars). The interim report of the commission of inquiry into tax administration and governance by Sars paints a terrifying picture of intrigue, fear, distrust and suspicion. The minister should restore public trust by announcing Sars commissioner Tom Moyane will be removed and a new appointment made without delay.
State-owned enterprises that require financial help include: Denel (R1bn); SABC (R1.2bn); SA Post Office (R2.7bn) and SA Airways (R21.7bn).
The minister should present a credible plan to reform failing state-owned enterprises by placing a moratorium on government guarantees and placing the national airline in business rescue and then privatising, or partly privatising, SA Airways.
Eskom, with its R387bn debt could blow up SA’s balance sheet. The minister should present a credible plan to turn the utility around by privatising, or partly privatising, the power generation assets; allow cities to purchase electricity directly from independent power producers; make it clear the R350bn government guarantee currently in place is a hard ceiling; and make full disclosure of the terms of the confidential R34.4bn loan from the Chinese Development Bank.
He should hold the fiscal line by announcing a comprehensive spending review