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Cape Town - South Africa's fiscal outlook has improved since the October 2017 mini budget, Finance Minister Malusi Gigaba said in his Budget Speech.
Investor confidence has grown on the promise of renewed policy coordination and effective implementation. Yet the challenges highlighted in October - rising national debt, significant revenue shortfalls and the precarious financial condition of several state-owned enterprises (SOEs) - remain central policy concerns, according to the budget review.
The consolidated deficit is projected to narrow from 4.3% of GDP in 2017/18 to 3.5% in 2020/21.
In the press conference before his speech, Gigaba said one of the main things that has actually changed since October is that almost R3bn more in taxes will be collected, reducing the expected shortfall for the current year from R50.8bn to just above R48bn.
Other encouraging signs are better investment sentiment after the ANC congress in December, the stronger rand-dollar exchange rate, hard decisions that have been taken on revenue streams, like the higher VAT rate, and an overall willingness of sectors in the economy, like mining to talk to government about obstacles to growth.
Altogether it is helping to create a better climate, Gigaba said. Despite an improved outlook, government still faces a revenue gap of R48.2bn in 2017/18, which feeds through to the outer years of the medium-term expenditure framework.
In addition, the December 2017 announcement of fee-free higher education and training entails an additional allocation of R57bn over the medium term. Accordingly, the 2018 Budget proposes measures to reduce the budget deficit while providing space for new spending commitments.
Firstly, cuts have been identified by a Cabinet subcommittee amounting to R85bn over the next three years.
The central adjustments to the fiscal framework in 2018/19 are:
- Raising an additional R36bn in tax revenue through an increase in the VAT rate, limited personal income tax bracket adjustments and other measures.
- Reducing the mini budget baseline expenditure by R26bn.
- Allocating R12.4bn for fee-free higher education and training. Over the next three years this allocation will amount to R57bn.
- Setting aside an additional R5bn for the contingency reserve. A higher contingency reserve of R8bn in 2018/19, R8bn in R2019/20 and R10bn in 2020/21 will allow for uncertainties associated with the economic outlook, SOE finances and other spending pressures.
- Provisionally allocating R6bn for drought management and public infrastructure.
Baseline spending reductions and tax measures will feed through to the outer years of the framework, while allocations to higher education will increase sharply. A narrower deficit, stronger rand and lower borrowing costs will result in gross government debt stabilising at 56.2% of GDP by 2022/23.
Net debt will stabilise at 53.2% of GDP in 2023/24. The risks to the fiscal outlook remain elevated and include uncertainty in the pace of economic recovery, public service wage pressures and precarious SOE finances.
Visit our Budget 2018 Special for all the news, views and analysis.
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