Treasury running out of money to meet SA’s needs
Funding pressures mount but SA’s rainy-day jar is empty, writes Claire Bisseker
he words of national treasury sum up the essence of last week’s minibudget, or medium-term budget policy statement (MTBPS), tabled by finance minister Nhlanhla Nene: “The resources available to the fiscus — which depends directly on the revenues generated by the economy — are expanding too slowly to meet the country’s development requirements.”
This week, Nene’s budget office will be scraping the bottom of the barrel to try to find an extra R2,6bn or so to fulfil President Jacob Zuma’s pledge of a 0% university fee increase next year.
Early indications are that the office may raid the surpluses of the National Skills Fund and perhaps even certain sector education training authorities, both of which fall under the department of higher education & training.
However, once these surpluses are eliminated, what then? Running down cash reserves is hardly a sustainable solution to the mounting funding pressures on higher education — and this is just one area of spending.
“The additional government resources needed to fund the 0% fee increase is not huge but the politics of demand have shown that [loud, disruptive protests] can work: first it was e-tolls, then student fees; what next?” asks Rand Merchant Bank currency strategist John Cairns.
Treasury is under pressure to find additional resources without resorting to tax hikes. But any room to move that remained in the budget has largely been absorbed by the outsize wage settlement for public servants agreed to earlier this year.
According to the MTBPS, the agreement will cost R63,9bn more than budgeted for over the next three years. To accommodate it, treasury has forced a hiring freeze on all
T15
12
9
6
3
0 departments. It will also use up R41bn from SA’s contingency reserves, leaving nothing in the current fiscal year, only R2,5bn in 2016/2017, R9bn in 2017/2018 and R15bn in 2018/2019. Normally, around R40bn-R50bn would be allocated, according to Nomura economist Peter Montalto. He says the “abnormally low levels” of contingency reserves allowed for in the MTBPS mean there is no wiggle room left.
Pressed to identify further room in the budget during pre-budget technical briefings, treasury officials pointed to the fact that its revenue projections for the coming three years assume that personal income tax brackets are fully adjusted for inflation and that tax rates are held constant.
In other words, space can be created by failing to account fully for bracket creep and by instituting new or higher taxes.
The MTBPS says that while additional taxes will be needed to fund government’s agenda, “they will be approached with caution, given weak economic conditions”.
No decision has been made on whether to raise the Vat rate from 14%, Nene says, but it remains an option.
“The door has always been open on Vat and is open for any other tax measures,” he told journalists. “If further steps are needed to protect the public finances, we will take them. We are staying the course.”
Treasury is staying the course by sticking to the existing expenditure ceiling over the medium term. This commitment is strengthened through the introduction of a new fiscal guideline that requires that spending remain stable as a share of GDP.
To achieve this in the context of low growth requires a steep slowdown in spending with main budget noninterest expenditure set to grow at just 0,9% in 2016/2017 — its slowest pace in well over a decade (see graph).
However, consolidated government spending (which includes debt service costs) is still set to grow faster than inflation over the medium term. This is a concern, given that treasury’s growth forecast still looks too optimistic in the outer years.