THE JAWS OF A DILEMMA

Gigaba’s first budget is going to reveal just how deep SA’S fiscal fault lines run. Prepare for a shocker

Finance minister Malusi Gigaba’s ability to stick to the fiscal consolidation path laid down by his predecessor, Pravin Gordhan, is the barometer by which the new minister stands to be judged when he presents his first medium-term budget next week.

But as much as Gigaba has pledged to hold the line, he has little prospect of succeeding. There are two main reasons for this.

The first is that Gordhan’s 2017 growth and revenue forecasts were made when there was still a reasonable prospect that the SA economy would bounce back from the drought and be able to take advantage of firmer commodity prices, better global growth and lower domestic inflation.

But Zuma’s axing of Gordhan and his deputy, Mcebisi Jonas, in March destroyed what little business and investor confidence remained and caused the immediate junking of SA’S foreigncurrency credit rating.

Economists are now expecting a revenue shortfall of R35bn-r50bn for the fiscal year because growth and tax revenue have underperformed dismally.

Compounding pressure on the fiscus is the challenge of poor governance and procurement practices, especially at state-owned enterprises (SOES). Then there are the funding demands of tertiary education, and the need to deal with infrastructure backlogs and municipal financial management challenges, says Raenette Taljaard, who heads Economics Research Southern Africa, a new economics think-tank in Cape Town.

“Though there is not a sense that the country is falling off a fiscal cliff, room to move within the fiscal space is distinctly narrow,” she says.

The second reason is that Gordhan had been kicking the fiscal can down the road for some time. He was counting on a growth recovery underpinned by unrealistic tax-buoyancy assumptions, all the while hoping that the fiscal risks would be contained a while longer.

But over the past year, the biggest risk has moved front and centre: delinquent

SOES have burnt through just over R300bn of government guarantees and now need new guarantees, as in the case of the SABC, or even bail-outs, as in the case of SAA.

“This has all but wiped out the R6bn contingency reserve for the current fiscal year, and more capital injections are likely to be needed for struggling SOES in future fiscal years,” says BNP Paribas economist Jeff Schultz.

As we now know, thanks to the Gupta email leaks and the public protector’s State of Capture report, the rot in the SOE sector runs deep. Gigaba must bear some responsibility for the sector’s poor performance, having made many dubious appointments to SOE boards while public enterprises minister from 2010 to 2014.

Nothing is more worrying than Eskom, which is unable to borrow from the markets and has already drawn down R218bn of its R350bn government guarantee.

It is unlikely that the energy regulator will approve Eskom’s full application for a 20% tariff increase for the coming fiscal year, nor will Eskom find it easy to renegotiate lower pricing agreements with renewable-power producers.

Eskom’s exposure to independent power producers amounts to roughly R125bn. Should Eskom run short of cash to buy power from these producers, as it has undertaken to do, government will be liable.

Unless the utility is able to sort out its management problems, it could sink the country’s finances.

Without unpopular corrective measures, “the country is well on its way to hitting a proverbial fiscal wall”, warns Rand Merchant Bank chief economist Ettienne le Roux.

He estimates that to stop the national debt from rising further above 50% of GDP, Gigaba will have to undertake “forceful” spending restraint, particularly relating to the state wage bill.

In the absence of this, the tax burden will have to rise by R100bn annually. Either that or the economy will have to grow by 4% — something that is well beyond its current capacity. Nobody is suggesting that the brakes on debt accumulation be slammed on to this extent, but it does indicate the scale of the ideal adjustment required.

By comparison, Le Roux points out that all the new tax measures announced in the

What it means: Huge revenue shortfall predicted and a Vat hike no is no longer avoidable