Cross four ‘red lines’ to give us hope, minister
David Maynier and Alf Lees
WE BELIEVE the Minister of Finance faces five challenges in his mediumterm budget policy statement, which will have to be dealt with to give hope to the 8.9 million people who do not have jobs, or who have given up looking for jobs, in South Africa.
Economic growth
The National Development Plan (NDP) envisages economic growth rates at an average of 5.4 percent per year, every year, for twenty years from 2010 to 2030.
However, this has not materialised and economic growth rates are likely to be revised down from 0.9 percent to 0.4 percent for 2016, more-or-less in line with the projections of the SA Reserve Bank.
The fact is that the economy is simply not growing fast enough to absorb the 8.9 million people who do not have jobs, or who have given up looking for jobs, in South Africa.
That the economic growth rate will be revised down will have major implications for the budget because, to borrow former finance minister Nhlanhla Nene’s favourite refrain: “Without economic growth, revenue will not increase. Without revenue growth, expenditure cannot increase.”
There are a number of external and internal factors holding back economic growth, and structural reforms have been proposed, including supporting private sector investment, dealing with infrastructure bottlenecks, improving policy certainty, improving labour relations and improving the ease of doing business.
However, the problem is that they are very rarely implemented and the minister, who has no control over economic policy development, or its implementation, can do very little about it, save to plead with ministers to implement the structural reforms outlined in the NDP.
The Minister in the Presidency, Jeff Radebe, who is responsible for co-ordinating the implementation of economic policy seems paralysed, most probably by divisions within the government, which dovetail with divisions in the ruling ANC/SACP/Cosatu alliance.
The situation is made worse by high levels of political uncertainty generated by the “civil war” within the ruling party, which undermines investor confidence, and as one rating agency put it: “We believe that political factors, if they continue to fester, could weigh more heavily on investor confidence than inconclusive labour or mining sector reform.”
We believe the minister must announce a package of structural reforms designed to kick-start economic growth and create jobs in South Africa.
The structural reforms could include a limited number of concrete measures, which have been agreed upon and will be implemented, including, for example, provision for a secret strike ballot to reduce the number of strikes; and increasing private sector investment in state-owned enterprises, including a private equity partner for SAA.
A package of structural reforms will go a long way to boost business confidence, which will, in turn, kick-start economic growth and create jobs in South Africa.
Fiscal consolidation
The minister is committed to a “prudent, sustainable fiscal policy trajectory” aimed at reducing expenditure, raising revenue, managing fiscal risks at state-owned enterprises in order to close the budget deficit, achieve a primary surplus and stabilise debt.
Years of debt-financed consumption expenditure have caused gross loan debt to increase by 256 percent from R626.97 billion, or 26 percent of gross domestic product (GDP), in 2008/09, to R2.23 trillion, or 50.9 percent of GDP, in 2016/17.
That is why the key “fiscal goal” is to stabilise net loan debt, which is R2trln, or 45.7 percent of GDP, and maintain it below 50 percent of GDP over the medium term.
Revenue
Total consolidated revenue of R1.32trln, or 30.2 percent of GDP, has been budgeted for 2016/17. However, weaker-than-projected economic growth is likely to result in lower-than-expected total consolidated revenue, despite raising taxes to generate an additional R18.1bn, in 2016/17.
The revenue data for the first five months indicates revenue was growing at 7.13 percent, compared with budgeted revenue growth of 9.8 percent, in 2016/17. The projected revenue shortfall, as a result of lower-than-projected economic growth, which is very difficult to forecast, may be significant in 2016/17.
Expenditure
Total consolidated expenditure of R1.46trln, or 33.3 percent of GDP, has been budgeted for 2016/17. The expenditure ceiling has been set at R1.15trln for 2016/17 and is maintained by cutting compensation of employees, re-prioritising expenditure and improving the efficiency of spending through cost containment measures and procurement reform. However, since then: Indications are that cost containment measures, especially those imposed on travel and subsistence, as well as catering, entertainment and venue hire, have had limited success.
Additional spending pressures have developed, especially in the higher education sector, which will require an additional allocation of at least R2.5bn to fund the zero percent fees increase for students who come from households with an income of less than R600 000 per annum, in 2016/17.
The expenditure data for the first five months indicates expenditure was growing at 6.53 percent, compared with budgeted expenditure growth of 6 percent, in 2016/17.
Deficit
The lower-than-expected revenue, taken together with higher-than-expected expenditure, is likely to result in fiscal slippage and may “blow out” the R139bn, consolidated budget deficit, which is already 3.2 percent of GDP, in 2016/17.
Debt
This will, in turn, put pressure on the borrowing requirement of R221.6bn and net loan debt of R2trln, in 2016/17. Debt service costs, which are expected to be R147.7bn, will also increase if the borrowing requirement increases above the R221.6bn mark, in 2016/17.
Slippage
Whatever the case, to avoid fiscal slippage, and fund new spending priorities, a significant fiscal adjustment will have to be made by introducing further spending cuts and/or drawing down on the contingency reserve, which was “topped up” by R3.5bn, and now stands at R6bn, for 2016/17.
We believe the minister must hold the fiscal line and maintain the fiscal deficit at 3.2 percent of GDP, by announcing a fiscal adjustment, in the form of further spending cuts and/or drawing down on the contingency reserve, for 2016/17.
We also believe the minister should announce a comprehensive spending review aimed at identifying savings and eliminating wasteful expenditure in all three spheres of government.
Such a review would require the Treasury, working together with national departments, provinces and municipalities, to review the composition of spending, the efficiency of spending, as well as future spending priorities, including the nuclear build programme, national health insurance, higher education and the public sector wage bill.
A good place to start cutting spending would be on President Jacob Zuma’s bloated cabinet, which could be reduced to fifteen ministries, saving an estimated R4.7bn per year. The review would ensure that the burden of spending cuts falls on consumption expenditure rather than investment expenditure, and does not fall disproportionally on provinces and municipalities.
State-owned enterprises
The Presidential Review Committee on StateOwned Entities made recommendations three years ago to improve the performance of stateowned entities, including “Recommendation 20”, which states: “Private sector participation in partnering with state-owned enterprises to deliver on the provision of both economic and social infrastructure should be encouraged and expanded.”
However, since then little or no progress has been made, save for the renewable energy independent power producers programme.
Whatever the case, SAA now symbolises the failure of state-owned enterprises in South Africa. The national airline has a board chairwoman who behaves more like a corporate warlord, acting in her private interest rather than in the public interest, and it is technically insolvent requiring a further R4.7bn going concern guarantee, hiking the total guarantees for the national airline to almost R20bn, in 2016/17.
And even worse, a leaked SAA memorandum, dated August 23, 2016, indicates that the total funding requirement is actually R7bn, and that the R4.7bn guarantee will not suffice for 2016/17.
The minister has committed to turning around the national airline, and to be fair he has made some progress in strengthening the board. However, there has been absolutely no mention of bringing in a private equity partner for SAA. We believe the minister should: Commit to implementing the recommendations of the Presidential Review Committee on StateOwned Entities, especially “Recommendation 20”, which provides for private sector investment.
Appoint a person with appropriate technical and business experience in the aviation industry to the board of SAA.
Announce that a private equity partner will be sought for SAA.
This is critical because state-owned enterprises are also a major risk to the sovereign rating since they are covered by government guarantees in the amount of R497.6bn in 2016/17.
At least one rating agency, S&P Global, warns that if net loan debt plus guarantees to state-owned enterprises exceeds 60 percent of gross domestic product (GDP), it will result in downward ratings pressure on South Africa.
The fact is that net loan debt plus guarantees to state-owned enterprises is now an alarming 57.42 percent of GDP in South Africa.
Student funding
The medium-term budget policy statement went up in smoke last year as the “#FeesMustFall” campaign rampaged outside Parliament. The fact is that poor students who qualify to be admitted to higher education institutions are battling, despite an additional allocation of R4.8bn in 2016/17.
The commitment made by the Minister of Higher Education and Training, Blade Nzimande, to fund a zero percent fees increase for all students who come from households earning less than R600 000 per annum, will require an additional allocation of at least R2.5bn in 2016/17. We believe the minister should: Announce plans to fund a zero percent fees increase for all students who come from households earning less than R600 000 per annum, in the amount of at least R2.5bn for 2016/17.
Make public the performance and expenditure review, conducted by the National Treasury, on the National Student Financial Aid Scheme.
Commit to a review of higher education funding following the release of the final report of the Presidential Commission on Higher Education and Training.
We anticipate there will have to be further adjustments to the budget over the medium-term following the release of the final report of the Presidential Commission on Higher Education and Training.
Conclusion
The minister will have to announce some tough choices during his medium-term budget policy statement today. However, he has very few options available to boost economic growth and create jobs in South Africa. The fact is: Fiscal expansion is not an option with a gross loan debt of R2.23trln, or 50.9 percent of GDP, in 2016/17.
Monetary policy easing is not an option with inflation outside the “target range” at 6.1 percent.
Although implementing structural reform is an option, the minister has no control over the implementation of the structural reforms necessary to boost economic growth and create jobs in South Africa.
What this means is that the minister effectively has both hands tied behind his back and is simply not able to ensure that structural reform to boost economic growth and create jobs is implemented in South Africa.
Whatever the case, the minister in our view should cross at least four “red lines” in order to give hope to the 8.9 million people who do not have jobs, or have given up looking for jobs, in South Africa. These include: Announcing a package of structural reforms to boost economic growth and create jobs in South Africa.
Holding the fiscal line by maintaining the fiscal deficit at 3.2 percent of GDP, in 2016/17.
Crowding in private sector investment by announcing that a private equity partner will be sought for SAA.
Announcing plans to fund a zero percent fees increase for all students who come from households earning less than R600 000 per annum, in the amount of at least R2.5bn for 2016/17.
In the end, the minister will deliver the mediumterm budget policy statement from the biggest political platform in South Africa. He will do so as a powerful symbol of what is good in a government that is otherwise at war with itself.
One imagines a standing ovation may be the order of the day in Parliament. And if there is a standing ovation, the big question is: will President Jacob Zuma sit or will he stand?
Today the Minister of Finance will deliver the medium-term budget policy statement from the biggest political platform in South Africa.