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Cape Town – Finance Minister Nhlanhla Nene took a strong stance on the urgent need to put in place measures that will restore ailing public finances to health in the Medium Term Budget Policy Statement (MTBPS) speech on Wednesday, an economist said.
Kay Walsh, Deloitte’s executive lead in Economics, said Nene noted that the domestic economic environment had deteriorated due in part to the shallow global economic recovery, but also due to structural challenges in the domestic economy.
“Over the past few years economic growth has consistently disappointed relative to National Treasury’s forecasts,” she said. “The October MTBPS growth forecasts appear to be far more conservative.
“The revised forecasts see GDP expanding at 1.4% in 2014, which is significantly lower than the 2.7% forecast in the February budget,” she said. “It is clear that the forecast economic recovery is going to take much longer than previously anticipated with GDP growth now only expected to reach 3.0% in 2017 (previously 2015).”
Watch the full interview here:
Walsh looks at tax proposals, structural reforms, belt tightening, and support for Eskom:
Facing the low-growth reality - additional measures proposed to reign in public debt
- While government spending has remained within the limits of the expenditure growth ceiling put in place in 2012/13, economic growth has consistently disappointed relative to National Treasury’s forecasts, which has translated into lower tax collections. Tax revenue collections have been revised lower by R10bn for 2014/15 due to underperformance of Corporate Income Tax, Customs duties, VAT and the fuel levy.
- The deficit on the main budget balance is forecast to remain stubbornly high at an expected -4.8% of GDP in 2014/15 (a slight deterioration from -4.7% forecast in February).
Net debt is projected to peak at 45.% of GDP 2017/18 (as opposed to 44% of GDP forecast previously)
A new fiscal package – belt-tightening, with new tax proposals around the corner
Government plans to introduce a number of measures to narrow the deficit and stabilise debt over the medium term; these include:
- Reducing growth in government spending – cutting the expenditure ceiling imposed in 2012/13 by a further R25bn a year over the next two years.
- Changes to tax policy and administration that will result in an increase in tax revenue of at least R27bn (over the MTEF)
- A longer-term fiscal plan will be adopted to ensure that the links between spending, growth and longer-term priorities are understood beyond the current medium-term expenditure framework horizon of three years.
- A freeze on government personnel headcounts will be imposed.
- A deficit neutral approach to financing state-owned companies will be adopted.
Tax proposals
- While little detail on tax proposal has been provided at this stage, the MTBPS hints at more progressive tax structure, suggesting the overall tax burden on wealthy individuals will be increased.
- This could either be in the form of increased tax rates for high income earners, or higher and\or additional “wealth taxes” such as capital gains tax, luxury vehicle tax etc. The recommendations of the Davis Tax Committee will inform the tax proposals.
- Tax revenue will also be enhanced by improving tax efficiency and achieving structural improvements in revenue.
- Targeted increases in tax revenue are R12bn in 2015/16, R15bn in 2016/17 and R17bn in 2017/18.
Support for Eskom and funding of SOEs in general
- Eskom is currently facing critical funding shortfall (an estimated R225bn) due the fact that electricity tariff increases awarded to Eskom by the National Energy Regulator of South Africa for the MYPD3 period (annual average increase of 8%) were substantially lower than what Eskom requested and required (16%).
As a result National Treasury has had to step into to offer Eskom direct financial support, this will include:
- A direct grant of at least R20bn based on the sale of non-strategic state assets – the so called ‘deficit-neutral’ approach.
- National government will work with municipalities to ensure that the equitable share is targeted to help poor households to cope with increased electricity tariffs.
- Eskom’s additional borrowing, expected to be R50bn over the medium term, will be accommodated within the existing guarantee facility so that no new guarantees (which could have an adverse impact on governments contingent liabilities) will be provided.
Additional measures to support Eskom that will not be provided by Treasury will include approval of additional tariff increases by Nersa through the regulatory clearing account mechanism in the tariff formula. Eskom will also be expected to realise some internal efficiencies – such as improved working capital management.
Over the medium-term, any funding of state-owned companies will be contingent on the implementation of a sound restructuring plan with strong government oversight. Because of fiscal constraints, capitalisation will only be funded through the sale of non-strategic assets and not through government debt or revenue.
Reforms are being undertaken at SAA, SA Express, the SA Post Office and the Land Bank.
Structural reforms, tackling the longer-term challenges in the South African economy
It is encouraging to see that the MTBPS appears to put greater emphasis on the structural reforms that will be implemented by government in order to address some of the key longer-term challenges that the South African economy faces, the structural reforms proposed include:
- Building the capacity of the public sector, particularly at local government level, through a “back-to-basics” approach, focused on service delivery, accountability and financial management.
- Improving the quality of the education system, starting with greater attention to human resources management and annual assessment of learners to benchmark progress.
- Reshaping South Africa’s urban environment through integrated spatial planning and the expansion of the municipal debt market.
- Enacting immigration reform to enable people with skills to work in South Africa more easily
- Enhancing dispute-resolution mechanisms in industrial relations
- Strengthening competition policy.
- Fin24
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