The 2015 Medium-Term Budget Policy Speech (MTBPS) was largely in line with expectations, with slight fiscal slippage confirmed. With South Africa’s economic outlook having deteriorated since February, the MTBPS indicated that tax revenue is under pressure.
Expected tax revenue has been reduced by a cumulative R35bn over the medium-term expenditure period. This is attributable to lower-than-expected GDP growth and the poor performance of corporate income tax, which is due to the steep decline in commodity prices.
In an environment of disappointing revenue collections it is important to signal a commitment to containing the spending line. On this score the MTBPS outcomes are mixed. Non-interest expenditure is expected to be slightly lower than what was budgeted for in February despite slippage on the public sector wage settlement.
The latest wage settlement will lead to a cumulative overspend on wages of R63.9bn over the coming three years relative to what was planned for in February, making it one of the fastest growing spending items.
Also of concern is that the overspending on wages will be funded by government’s contingency reserves. The contingency reserve, which is money set aside to meet unforeseen spending, has been reduced significantly for the next three years. This leaves Treasury with a limited buffer in case something else goes wrong.
Besides the erosion of emergency buffers to fund overspending on the wage bill, government is finding it difficult to change the composition of its spending. Since wages account for over a third of total government spending, the slippage on the wage bill has inhibited government’s ability to shift spending away from current towards capital expenditure.
In fact, spending on current payments will grow by 8.2% over the medium term; almost double what payments for capital assets will grow by.
Encouragingly, Treasury is achieving savings on goods and services, an area that has been subject to significant waste in the past. Next year this item will grow by 6.4%, down from 7% this year.
A further challenge from a spending perspective is the interest bill. This will be the fastest growing item over the medium term (10.9% per year). Higher levels of public debt and a weaker rand (which pushes up costs of servicing forex-denominated debt) could both lift interest costs even further.
This is an excerpt from an article that originally appeared in the 5 November 2015 edition of finweek. Buy and download the magazine here.