By: Maarten Ackerman, Chief Economist and Advisory Partner
It was clear going into this Medium Term Budget Policy Statement (MTBPS) that is was going to be much tougher than previous years, simply because economic growth and tax revenues are so much worse than had been forecast. Economic growth expectations for 2018 have been halved from 1.5% in the February Budget Speech to 0.7% now. Likewise the messaging is very different compared to February’s Budget Speech and the last MTBPS which was delivered by former Finance Minister Gigaba.
Slower growth will have a ripple effect in terms of tax collection which will, in turn, place additional pressure on fiscal targets and debt to GDP ratio. From a deficit of 3.6% of GDP in February, we now expect a deficit of some 4% of GDP, where it should stabilise over the budget framework.
More positive messaging
But despite this deterioration, it is probably a more positive budget in terms of its messaging compared to last year’s MTBPS. At that stage, we had started to make provision for projects such as the nuclear deal, resulting in a debt to GDP ratio that would be rising to 60%, a key level that signals a dip in economic soundness to the rating agencies. If breached, especially at a time of challenges coming from state owned enterprises, it could signal a credit downgrade.
Subsequent to that speech, we were indeed downgraded and although debt to GDP is still expected to approach 60% and stabilise there over the budget framework period, the message of fiscal discipline and building towards future growth is more reassuring.
February tax hikes unlikely
Tax revenue is projected to fall short by R27.4 billion on the back of our economic headwinds. Despite this, a distinct positive emerging from the MTBPS is that an increase in personal or company tax in the February budget seems unlikely which should provide some relief for a battered consumer base.
Importantly, after the panel of experts looked at zero-rated items for VAT, three more items will now be zero-rated – sanitary pads, bread flour and cake flour – as from 1 April 2019. While this will cost the fiscus R1.2 billion, given the tough consumer environment it is an opportunity to give something back to the people, especially the lower income groups.
Mboweni emphasised the importance of stabilising and reducing national debt, warning that government cannot continue to borrow at the same rate, and acknowledging the high tax burden and financial pressures already placed on consumers.
Focus on government spending: lower wage bill, higher investments
Encouragingly, he also emphasised that government needs to focus on addressing the mismanagement of funds, reducing irregular expenditure and ensuring that government spending is more efficient.
Mboweni also correctly flagged South Africa’s growing fiscal deficit as an issue requiring urgent attention, and in particular pointed to the problem of the growing public sector wage bill, with wage increases that have been running well above inflation for a number of years. This year’s wage agreement exceeding the budget baseline by R30bn, for example, meaning a massive funding challenge.
The South African public sector wage bill is currently the highest among the OECD countries, and remains one of the country’s greatest fiscal challenges moving forward. And although government will be very reluctant to reduce the size of the public sector in the run-up to an election year, it is positive to see that they are well aware of the issue and will turn their attention to reducing this expenditure over time.
On another positive note, Mboweni further highlighted the need for government investment over consumption, as a lack of investment in the economy over the past few years has contributed to unemployment stagnation in mining and manufacturing output and job creation.
Private-Public Partnerships are part of the solution
In terms of State-Owned Enterprises (SOEs), we saw a huge shift in messaging from previous speeches which had emphasised government’s ongoing commitment to no private partnerships. In a complete turn, Mboweni instead acknowledged that the walls that exist between the public and private sector must be lowered and private partnerships considered in order to turn poorly performing SOEs around.
This shift seems to reflect government’s realisation that, while changing the boards and reducing corruption and mismanagement are steps in the right direction, these organisations are in serious financial need. Given the financial constraints that SOEs are under, private-public partnerships are definitely part of the solution, and this acknowledgment represents a huge step forward.
Mboweni was very clear that government would like to rebuild confidence and unlock private capital and investment, referring to the need for greater policy certainty through long-term plans such as finalising the Mining Charter, withdrawing from the Minerals and Petroleum Resource Development Act Amendment Bill and re-examining South Africa’s visa requirements.
In terms of the re-prioritisation of public spending, there has been a great deal of speculation over where the funding for President Ramaphosa’s R50 billion stimulus package will come from, and what government will do with it.
Government will allocate R15.9 billion to infrastructure programmes, R16.5 billion to various programmes including restoring capacity at the South African Revenue Service (SARS), while the Land Bank is expected to conclude transactions in support of the agricultural sector to the value of R16.2 billion years over the next three to five years.
If government is able to fulfil these commitments while reducing inefficiencies, then this spending should support job creation and drive economic growth.
It may take time, but confidence will return
The message is clear: although the numbers are now weaker than in February, it is not because we have the wrong plan in place (as was the case last year). We do have the right plan but it will take time to deliver, as long as we can stay on course. Although the economy may look a little bit weaker over the medium term, eventually these policies will restore confidence and attract investment back into South Africa.
Although the market did sell off with bond yields rising to 9.20% indicating the greater pressure on government borrowing and the currency slipped notably once the minister presented the framework, we should not discount the positives contained in this important MTBPS.
By: Maarten Ackerman, Chief Economist and Advisory Partner