Tito’s budget gets tepid reception
● Finance minister Tito Mboweni plans to stick with only modest tax hikes over the next four years, relying mainly on wage bill cuts that have yet to be negotiated with labour in his effort to stabilise SA’s soaring public debt burden and prevent a sovereign debt crisis.
The medium-term budget he tabled on Wednesday set out a less ambitious fiveyear timeframe to stabilise the debt at 95% than the June supplementary budget’s plan to stabilise it at 87% in three years.
But it relies on targeted spending cuts that Treasury officials said would total R460bn over four years including the current year, with R310bn of this coming from cuts to the public sector payroll.
It’s had a lukewarm reception, with economists and ratings agencies highlighting the risks to its implementation.
Fitch said achieving debt stabilisation would depend crucially on difficult negotiations with public sector trade unions.
Moody’s said on Friday it expects deficits to be substantially wider than the medium-term budget statement (MTBPS) projected, with debt service costs reaching higher levels than the budget expected and government needing to run a higher surplus in order to stabilise its debt.
“This year’s MTBPS, like last year’s, does not outline how and when it will implement policies to boost growth and arrest the deterioration in public finances. As a result we expect the economy will remain subdued and fiscal consolidation will be slow, sustaining the rise in government debt over the next couple of years,” Moody’s said in a report.
The spending cuts targeted in the MTBPS — which the Treasury’s Ian Stuart said would total R460bn over four years, including the current year, of which R310bn will come from reducing the public sector wage bill — will only partly offset a cumulative revenue shortfall which is now expected to reach R791bn over the medium term.
SA Revenue Service (Sars) commissioner Edward Kieswetter said in an interview that the lockdown in addition to an already declining economy pre-Covid had given the tax base a significant knock.
Figures for April to September show business taxes down 22.7% compared with the same period last year and employment taxes down 11.6%.
“And you have to factor in this is not a one year blip,” Kieswetter said, with high levels of retrenchment and business rescues and liquidations impairing SA’s tax capacity for years to come.
Sars had also seen a steady negative trend in compliance levels and the aggressive use of tax losses, “reflective of businesses struggling, but also of declining tax morality”, Kieswetter said.
As in June, the Treasury has targeted total tax hikes of R40bn over the next four years, starting with R5bn in the 2020/21 fiscal year and ending with R15bn in the final year, which is still less than the annual tax hikes on which the government relied over much of the past decade.
Details of next year’s hikes will be announced in February’s main budget. But tax experts reckon Mboweni will likely again give only partial relief for fiscal drag — so-called “bracket creep” — which is estimated at about R9bn a year at the moment.
Wednesday’s budget left deficit projections for the current year unchanged, but the longer timeframe to stabilising the debt will see significantly higher deficits over the next three years — which means the government’s borrowing requirement, R774bn in the current year, will decline to still very high levels of over R600bn over the next two years, raising questions about government ability to fund this and potentially putting further upward pressure on long-term interest rates.
“We will have challenges in relation to funding this deficit,” said Treasury acting deputy director general (asset and liability management) Tshepiso Moahloli.
The government turned to international financial institutions to raise $7.3bn (R118bn) this year and has so far raised $5.5bn, including the first-time $4.2bn loan from the International Monetary Fund. But it has yet to reach agreement with the World Bank on a planned $2bn loan.
Moahloli said there was nothing sinister in this but it was a different kind of loan to the smaller $50m Covid response loan that was originally envisaged.
The Bank loan was a developmental policy loan and certain reforms and changes would need to happen before the loan was disbursed, and disbursements would be in tranches based on progress in relation to policy reforms.
Moahloli said the government did not plan to return to international markets for funding in the current fiscal year but would in future years.
Moody’s expects deficits to be substantially wider than projected