Here’s what you need to know about this year’s medium-term budget

2019-09-30 21:48
Tito Mboweni, South African Minister of Finance wa
Tito Mboweni, South African Minister of Finance walks with members of the Finance Ministry up Government Avenue to deliver his medium-term budget speech on October 24, 2018. (RODGER BOSCH/AFP/Getty Images) ~ AFP

The medium-term budget policy statement (MTBPS) will be announced on October 30th – a week later than planned, to accommodate international commitments by both Finance Minister Tito Mboweni and President Cyril Ramaphosa.

It could be one of the most important since the introduction of the MTBPS, or mini budget, in 1997.

Here’s what you need to know:

What is the mini budget

The medium-term budget sets out government’s priorities over the next three years and proposes allocations to different departments, as well as the provincial and local governments. It also provides an update on government finances and economic growth, and makes emergency changes to spending.

How does it differ from the budget?

Every year in February, government announces it national budget, which includes all tax changes and spending plans for the year.

The MTBPS is an update to that budget, detailing how spending and tax income may have changed given new developments in the economy.

“In the same way as an individual's budget gets adjusted throughout the year following unforeseeable events such as a car accident, the MTBPS is an adjustment of government spending based on current economic conditions,” explains Dr Hugo Pienaar, chief economist at the Bureau for Economic Research.

Unlike the national budget, the mini budget does not propose major changes to government spending or taxes, and does not introduce new taxes.

Why is the medium-term budget important, then?

It gives an update on tax collection, government spending and deficits, economic growth targets and more, to signal whether the country is still on track to meet plans laid out in the main February budget. 

It also gives government a chance to reprioritise spending to areas that may urgently need more money. For example, last year, more than R32bn over three years was reprioritised towards infrastructure, housing subsidies and other priorities.

Government also believes the min budget helps increase transparency, and aids citizens in understanding how the nation’s social and economic development goals are being attained.

What can I expect from this year’s MTBPS?

In short, not a lot of good news. In a presentation to the ANC’s national executive committee over the weekend, Mboweni warned that growth is faltering and tax revenue has disappointed despite tax hikes, including the VAT increase.

He said the outlook for growth has worsened significantly since the February budget, and growth was likely to remain below 2% “for at least the next two years”.

Accordingly, growth and government revenue targets could be slashed. Government will also have to pull out all the stops to show that it is curbing government spending to keep ratings agency Moody’s happy.

Moody’s is the only credit rating agency that hasn’t yet downgraded South African bonds to “junk”.

If SA lost its investment rate grade from Moody’s, it would cost the country its place in Citigroup’s World Government Bond Index, which only contains only bonds that are investment grade. 

All the massive investment funds that track the index would have been forced to sell their South African government bonds. Bank of America has estimated that South African bonds would be sold off to the tune of $14 billion (R167 billion). This would have lowered the value of our bonds, and make it much more expensive for government to borrow money to keep the country afloat. 

Moody’s is due to announce a decision on November 1st – straight after the medium-term budget.

It will be a surprise - but Mboweni may use the MTBPS to launch government’s new growth strategy, which Ramaphosa confirmed on Monday will be finalised within the next few weeks. The strategy is expected to include plans to sell of state-owned companies, perhaps even some of Eskom’s coal-fired power stations, and roll back collective bargaining agreements to exclude smaller businesses.

How could the MTBPS impact you this year?

If you are not an employee at a state-owned entity, there most likely won’t be any direct impact, not tax-wise at least. It should give you some indication of the tax hikes you may expect next year.

But if the mini budget shows no progress in containing government spending and no new plans to bolster the economy, a Moody’s downgrade – at least to a “negative outlook”, the last stop before a full downgrade - can be expected.