Mini-Budget – Good and Bad

Cost-cutting measures for bulging public sector wage bill

Finance Minister Tito Mboweni has outlined a raft of cost-cutting measures that will see government save billions of rands in the public sector wage bill.

Speaking in Parliament today, Mboweni said government has to significantly reduce expenditure in goods and services as well as transfers if it is to stabilise debt by 2022/23.

The interventions will see the axe fall on various perks and salary increments frozen and later cut.

As a first step, he said, the National Treasury has identified spending reductions of R21 billion in 2020/21 and R29 billion in 2021/22 in these areas.

“In addition, non?interest spending in the outer year of the framework is constrained in line with consumer price inflation,” he said.

The Minister said government will need to find additional measures in excess of R150 billion over the next three years – about R50 billion a year – if it is to achieve its target.

To achieve this, Mboweni said government will need to deal with the bulging public service wage bill, state?owned companies, executive remuneration and benefits and fiscal leakages.

In the Review accompanying the MTBPS statement, the National Treasury sets out a detailed analysis of spending on public?sector wages. It reveals that 29 000 public servants, plus members of the national executive, Members of Parliament, members of the provincial executive, among others, each earned more than R1 million last year.

“After adjusting for inflation, this is more than double the number of civil servants earning more than R1 million in 2006/07,” he said.

The average wage increase across government was 6.8% in 2018/19, or 2.2% above inflation.

After adjusting for inflation, the average government wage has risen by 66% in the last ten years, he said.

In his speech, Mboweni also called for a reduction in Board and Executive Management compensation and benefits.

He said President Cyril Ramaphosa has agreed to guidelines which will apply to members of the Cabinet and members of provincial executives. These include that, in the foreseeable future, Cabinet, Premiers and MECs’ salaries will be frozen at current levels, with the likelihood of an adjustment downwards.

The guidelines also call for the cost of official cars to not exceed R800 000 VAT inclusive, as well as a new cell phone dispensation that will cap the amount claimable from the state.

According to the guidelines, all domestic travel will be on economy class tickets.

There will no longer be payment for subsistence and travel for both domestic and international trips on these levels, said Mboweni.

He urged leadership in Parliament to think about how they can further contain their compensation and benefits.

Finance Minister sets tougher conditions for Eskom cash support

Finance Minister Tito Mboweni says going forward, any cash injection aimed at supporting the cash flow for embattled power utility Eskom will be in a form of loans, and not equity.

In a strongly-worded announcement during his Medium-Term Budget Policy Speech (MTBPS) on Wednesday, Mboweni said it can no longer be business as usual at Eskom and that the power utility’s power plants and equipment need to be run better.

He said this a day after Public Enterprises Minister Pravin Gordhan released a Special Paper that is aimed at providing a roadmap for electricity generation and distribution at Eskom.

“Going forward, new cash flow support will no longer be equity but will be in the form of loans.

“Once I am convinced that the Eskom board and management have made an irrevocable commitment to implement government’s decisions and there is enough progress, we will negotiate the appropriate size of debt relief.

“Eskom is a business and should be run that way,” Mboweni said.

Releasing the Special Paper on Eskom in Tshwane on 29 October 2019, Gordhan told journalists that the unbundling of Eskom — announced by President Cyril Ramaphosa in his State of the Nation Address in February — will see the power utility separating its transmission component into a subsidiary of Eskom Holdings by March next year, with the generation component to be divided into three clusters to allow intra-company competition between power plants.

Tabling the mini-budget, Mboweni said government has announced a comprehensive set of structural reforms for Eskom and the energy sector, which “we are supporting with R230 billion over the next 10 years.”

This was accompanied by very difficult budget adjustments.

To meet unanticipated cash needs, National Treasury brought forward R26 billion in 2019/20, R33 billion in 2020/21 and R10 billion in 2021/20.

Further delays in operational reforms could mean additional support is required.

“We cannot continue to throw money at Eskom. For the sizeable support required, it cannot be business as usual,” he said.

Mboweni said Eskom needs to:

– Run their current plant and equipment better;

– Achieve other operational efficiencies, including much better cash management;

– Fast track the separation of the utility into three parts, as endorsed by the political principals.

Challenges for Eskom

Meanwhile, National Treasury said in its Budget Review that Eskom remains the most serious risk to the fiscus, as it has a significantly high debt burden and has made limited progress with the necessary reforms announced in February this year.

Eskom had used R289 billion of its R350 billion government guarantee facility by 31 August 2019, with another R43 billion committed to specific funding instruments but not yet used.

“The utility relies on government support, borrowing from existing facilities and securing new debt to maintain a positive cash balance. In the current financial year, government has provisionally allocated appropriations totalling R49 billion for Eskom,” National Treasury said.

Inflation expected to rise steadily due to electricity tariff hikes

Headline inflation is expected to increase gradually in 2019 with the Reserve Bank maintaining its inflation targeting policy of below 6%, the National Treasury said on Wednesday.

“Inflation is forecast to increase gradually as a result of electricity tariff hikes, and higher meat and grain prices.

“Administered price inflation remains high, with electricity and water producer price inflation reaching 14.6% in July 2019,” the National Treasury said.

Finance Minister Tito Mboweni tabled his medium-term budget in the National Assembly, on Wednesday afternoon.

“In September, headline consumer price inflation was 4.1%. Lower inflation is good for everyone, particularly for the poor and the working class.

“In short, it is a mixed picture with some positive signs.”

Consumers spending less on non-essential items due to rising unemployment, fuel hikes

According to the National Treasury’s budget review, consumption expenditure grew by 1% in the first half of 2019 compared with the corresponding period of 2018.

“Although household spending remains the main support for growth, spending on non-essential items has fallen dramatically due to rising unemployment, successive fuel price hikes and tax increases.

“Retailers are responding by keeping prices low and margins tight.”

The National Treasury said a mild acceleration in consumption is forecast over the next three years as employment and income growth are expected to recover only gradually.

“Inflation pressures have been subdued in 2019, with inflation averaging 4.3% from January to August, mainly due to weak demand.

“Within its flexible inflation-targeting mandate, the Reserve Bank is focused on anchoring inflation expectations at the midpoint of the 3 to 6% target band.

“The repurchase (repo) rate stands at 6.5%, after a 0.25 percentage point cut in July to support growth.

“Reserve Bank modelling suggests a further 0.25 percentage point cut in rates before the end of 2019.

“The Reserve Bank has expressed concerns about risks of global financial market disruptions, as well as the effect that a loss of confidence could have on the rand and inflation.”

Minister projects a R53bn revenue shortfall

Finance Minister Tito Mboweni has projected a R53 billion revenue collection shortfall for the current financial year.

According to the National Treasury’s budget review document, the bulk of the 2018/19 shortfall resulted from weaker-than-expected economic growth in 2019.

“We now expect to collect R1.37 trillion this year. This is R53 billion, or 4%, less than we expected.

“Looking ahead, our revenue forecasts are prudent. We assume an elasticity of one, which means a one-to?one relationship between growth in taxes and economic growth, after adjusting for tax measures,” he said.

In 2018/19, government collected R57.3 billion less than projected in the 2018 Budget, and R14.5 billion less than set out in the 2019 Budget.

The 2018 revenue collection shortfall was the largest under-collection since 2009/10, following the global financial crisis.

It was partly driven by large and unexpected once-off payments of VAT refunds in line with commitments in the 2018 revenue collection.

Tabling the medium-term budget on Wednesday, Mboweni said to meet government’s fiscal needs, growth was not enough.

“We also need a well?functioning and efficient revenue collection agency.

“The South African Revenue Service is emerging from its own winter.

“Cabinet has approved that we implement the findings of the Nugent Commission of Inquiry into Tax Administration and Governance, and I intend to table a bill early next year. The President has appointed Edward Kieswetter as the new Commissioner.”

Mboweni said since Kieswetter started work in May, he has already taken steps to re?invigorate and re?establish the Large Business Centre, and the litigation, integrity and compliance units.

Leadership, staffing and procurement failures are also being addressed.

He said to achieve a more inclusive South Africa, government relies on honest taxpayers. “Without your taxes, South Africa will never succeed. Thank you to all those who have honoured their obligations. But you have told us that we must spend your hard?earned money better, and we could not agree more.

“Looking ahead, our revenue forecasts are prudent. We assume an elasticity of one, which means a one-to?one relationship between growth in taxes and economic growth, after adjusting for tax measures,” he said.

NPA, SARS receive cash injection

The National Prosecuting Authority (NPA) and South African Revenue Service (SARS) will, respectively, receive an additional R1.3 billion and R1 billion over the next two years as government bolsters corruption fighting efforts and improve revenue collection.

Announcing this while delivering the Mid-Term Budget Policy Statement (MTBPS) in Parliament on Wednesday, Finance Minister Tito Mboweni said the State is beginning to improve its efficiency.

“Where possible, given budgetary constraints, government is shifting resources to areas that urgently need to strengthen capacity,” he said.

Through reprioritisation, the NPA receives an additional R1.3 billion, and the South African Revenue Service receives an additional R1 billion for the next two years. These funding shifts, Mboweni said, will bolster efforts to combat corruption and improve revenue collection.

Earlier this month, Cabinet approved over 14 000 hectares of land to be released for human settlements development.

Mboweni said National Treasury has reviewed the procurement regulatory framework and developed a Public Procurement Bill.

“It will be submitted to Parliament in due course,” he said.

The Minister said the State is making progress on improving efficiency.

“The State can use its budget better. For example, the South African National Defence Force buys more than R900 million worth of food a year,” he said.

Operation Koba Tlala (meaning ‘Chase away the hunger’) is a deliberate action to buy this food from nearby suppliers, he said.

User pay maintained in e-tolls

Government has resolved to retain the user pay principle in the contentious Gauteng e-tolls matter.

In July, President Cyril Ramaphosa had mandated Transport Minister Fikile Mbalula, working with Finance Minister Tito Mboweni and Gauteng Premier David Makhura, to submit to Cabinet a solution to the impasse around electronic tolling (e-tolls) on Gauteng freeways.

Delivering his second Mid-Term Budget Policy Statement (MTBPS) in Parliament on Wednesday, Minister Mboweni said Cabinet has considered several options to resolve the impasse over the Gauteng Freeway Improvement Project.

The controversial Gauteng Freeway Improvement Project (GFIP) was launched on 8 October 2007 to ease increasing congestion on Gauteng roads. E-tolling on the Gauteng Freeway system started on 3 December 2013, following a lengthy period of consultation.

“Government has decided to retain the user pay principle. While there will be a further dispensation and value?added services, compliance will also be strengthened,” he said.

Not paying for tolls has already led to the country’s road network deteriorating.

“We have been unable to maintain the network. I urge the nation to please pay your bills,” he said.

The country, he said, needs to build a culture of payment, as government services can only be sustainable if all South Africans can pay for services.

Task force to tackle illicit cross-border flows, tax evasion

National Treasury has set up a Financial Action Task Force in an effort to curb illicit cross?border flows and tax evasion.

Delivering the 2019 Mid-Term Budget Policy Statement (MTBPS) in Parliament on Wednesday, Finance Minister Tito Mboweni said the task force will review government’s approach in dealing with money laundering.

“Steps are also being taken to strengthen cooperation between the Financial Intelligence Centre, the South African Reserve Bank and SARS [South African Revenue Service],” the Minister said.

To promote investment and reduce unnecessary, burdensome approvals, Mboweni said the Reserve Bank will propose a more modern, transparent and risk?based approvals framework for cross?border flows.

“Rules on active currency hedging, loops and mortgages for individuals living and working in South Africa will be reformed. To support regional integration, the HoldCo [holding company] regime will be extended to all banks,” he said.

The Reserve Bank, Mboweni said, has kept inflation stable during a very difficult period.

“They also declared a substantially increased profit share to the government. The Bank is a strange creature of statute – even though we do not own it, the National Revenue Fund receives 90% of the profits, after provisions ordinarily made by bankers. It is a beautiful arrangement – we do not have to invest any money in the Bank, but we get almost all the profits plus taxes,” said Mboweni.

The MTBPS document also notes that the SARS Large Business Centre, which focuses on major firms and high net worth individuals, was officially reopened in October.

“National Treasury will release a discussion document that reviews and proposes options to improve tax administration oversight by the 2020 Budget,” the document states.

Mboweni tables wasteful expenditure interventions

The National Treasury has tabled before Parliament a litany of options the state has to consider if it is to improve efficiency and reduce wasteful expenditure.

Among these is the regulation of development charges through the Municipal Fiscal Powers and Functions Amendment Bill, which will be tabled shortly.

Presented by Finance Minister Tito Mboweni today, the “Growth, Sustainability and Renewal” document also recommends that National Treasury endorses the suspension of the implementation of new public transport networks in cities that have been in the planning stage for over a decade with no roll-out of services to residents.

The document also calls for the merging and consolidation of entities and regulatory agencies and disposal of unused land and other assets.

“Initiate work to limit claims against the state, including through a review of medico-legal claims and accelerated implementation of the Road Accident Benefit Scheme,” reads the document.

The report also calls on government to manage benefits received by political office bearers, through reforms to the Ministerial Handbook.

The National Treasury in the document also calls for the review of the existing procurement regulatory framework, through the Public Procurement Bill, to simplify procurement processes and governance.

Addressing reporters, Mboweni said the public sector wage bill has shot up dramatically over the years and needed to be addressed.

“We need a conversation with unions on how to moderate the wage bill. I am not saying it is equivalent to cutting; I’m certain we’ll find each other when we begin the conversation,” he said.

Ministers to fly economy class, buy their own cellphones

Finance Minister Tito Mboweni says there is a need to trim civil servant perks and stop wastages as the debt to GDP ratio is expected to rise to 71.3% in 2023.

This will include relooking at how much the public service spends on Ministerial cars, cellphone benefits and ensuring that everyone — including Ministers, the provincial executive and Mayors — travel economy class for all domestic flights.

The Minister said this when he briefed the media ahead of tabling the Medium-Term Budget Policy Statement at the Imbizo Centre on Wednesday.

“There are a number of risks to the fiscal framework, which this government has to confront head-on. The debt to GDP ratio is beginning to reach unsustainable levels. Once the debt to GDP reaches 60%, we should be concerned. Ideally, it should be 30% or lower.

“So the debt to GDP ratio is a very serious matter we need to attend to,” Mboweni said.

In the past, Ministers used to travel first class with their assistants. This was changed and currently, Ministers are eligible to travel business class.

Mboweni said government will stop buying cellphones for public representatives and senior managers in the public service. This area of expenditure will be looked at with a view of forcing public servants to buy their own phones and claim for official calls.

He said an audit of how much government spends on cellphones currently stood at R5 billion “on a 12 month basis”.

Mboweni said the desirable sweet spot would be to see the GDP to debt ratio stabilising at 64% in 2022.

“Now we are in October 2019, and we have a few months to go before the February 2020 budget. In reality, it means we have some time for some very serious conversations.”

The Minister said National Treasury is looking at ways of capping spend on official cars to not exceed R800 000, including VAT.

What needs to be done to stabilise debt

Mboweni said the problem with the country is that government spends more than it makes.

“Our problem is that we spend more than we earn. It is as simple as that. How will we fix our problem? To stabilise debt, government will target a primary balance by 2022/23. The target measure excludes support to Eskom because that is part of a separate process.

“As a first step, we have identified spending reductions of R21 billion in 2020/21 and R29 billion in 2021/22 mostly in the area of goods and services, and transfers,” he said.

In addition, non?interest spending in the outer year of the framework is constrained in line with consumer price inflation. Mboweni said if the country wants to achieve its target, there is a need to find additional measures in excess of R150 billion over the next three years or about R50 billion a year.

“How will we do this? We will need to deal with the challenges of the wage bill, State?owned companies, executive remuneration and benefits and fiscal leakages,” said the Minister.

He hinted at the possibility of selling off non-strategic assets in order to raise some cash.

“[The National Treasury Director-General] and myself have an agreement that we are going to sell some assets. When you are in difficult times … you rebalance your portfolio.

“The Director-General and I are looking very carefully to decide which of these State-owned entities (SOEs) should be in public hands and which ones shouldn’t be. We have time between now and February to seriously deal with these issues,” he said.

SA’s economic growth projection revised down to 0.5%

South Africa expects the economy to grow at a rate of 0.5% in 2019 – which is a downward revision from the 1.5% that was projected in the February budget.

Finance Minister Tito Mboweni said this when he tabled the Medium Term Budget Policy Statement (MTBPS), also known as the mini-budget, at the National Assembly on Wednesday afternoon.

“It is our job to chart a course that is strategic, sober, careful and inclusive. The economy is now forecast to grow at 0.5 % in 2019 compared to the 1.5 % expected in February,” he said.

In addition, growth is projected to slowly rise to 1.7 % in 2022, supported by household consumption and private?sector investment.

Mboweni’s projection comes after the country’s Gross Domestic Product (GDP) contracted by a revised 3.1% on a seasonally adjusted and annualised basis in the first quarter of the year.

As the energy constraint lifted, growth rebounded to 3.1 % in the second quarter.

“These two quarters cancelled each other out, and this year growth has been flat.There are some signs that investment spending is strengthening. In the second quarter, growth in gross fixed capital formation rebounded to 6.1 %,” he said.

Meanwhile, mining grew by 14.4% while credit growth in real terms has been positive since late 2018. Private sector credit extension rose 6.2% in September.

Mboweni also said that home loans grew by 5% year?on?year, the fastest rate seen in some time.

When the Minister presented the 2019 Budget in February, he walked into the National Assembly with an Aloe Ferox plant.

He said like the plant, the economy has since gone through a difficult winter where the ground became hard and the leaves fell from the trees.

This translated to poverty worsening and people losing their jobs. Government expenditure continues to exceed revenue while the national debt is increasing at an unsustainable pace.

“As any farmer will tell you, if you want a bumper harvest, you must be prepared to work hard during the end of winter and early spring. Because what you do to the soil then determines how successful your crop will be.”

“Now is the time. We cannot wait any longer. If we want a successful harvest, we must act today,” said Mboweni.

NHI roll-out to cost an additional R33 billion

The rollout of the much-anticipated National Health Insurance (NHI) will require an addition R33 billion annually from the 2025/26 financial year.

This was revealed in the National Treasury’s adjusted estimates of the national expenditure document released at the tabling of the 2019 Medium Term Budget Policy Statement (MTBPS) on Wednesday.

This would be in addition to the previous estimations contained in the Green and White Papers of 2011 and 2017 respectively, of R74 billion a year.

“Following the introduction of the National Health Insurance Bill in Parliament earlier this year, the Department of Health reprioritised funds within its 2019/20 budget to establish an NHI Office. Over the medium term, this office will receive increasing allocations for its operational costs,” it said.

The NHI policy aims to provide healthcare more equitably in South Africa, with a priority to improve the efficiency of service delivery.

Measures being undertaken for the rollout include improving the management of patient records, for example by rolling out the health patient registration system to streamline management processes in health facilities.

Initially NHI costs were projected to increase public health spending from about 4% to 6% of Gross Domestic Product (GDP) over 15 years.

“However, given the macroeconomic and fiscal outlook, the estimates to roll out NHI that were published in the NHI Green Paper in 2011 and White Paper in 2017 are no longer affordable,” adds the document.

The National Treasury assisted the Department of Health to develop an actuarial model with updated fiscal costs and limited policy reforms to strengthen the current healthcare system.

The revised model estimates that rolling out NHI would require an additional R33 billion annually from 2025/26. These amounts are not budget commitments but indicative cost estimates.

Provinces will receive a direct grant to contract health professionals in pilot NHI districts. This is currently funded through the NHI indirect grant.

In addition, the National Treasury and the Department of Health will develop a strategy to reform health grants prior to implementing NHI.

Sustainable solution needed for struggling SOCs

Governance failures and poor operational performance at some state owned companies continue to pose a risk to the fiscus, National Treasury said on Wednesday.

In its Growth, Sustainability and Renewal document, Treasury said decisions are required to manage the ongoing impact of these entities on the fiscus.

The document notes that state owned companies (SOCs) are adding to spending pressures on government, with funding for South African Airways (SAA), the South African Broadcasting Corporation (SABC) , Denel and South African Express amounting to R10.8 billion in the current year.

Meanwhile, the national carrier, SAA, is unlikely to generate sufficient cash flow to sustain operations in its current configuration.

“Government will repay SAA’s outstanding government guaranteed debt of R9.2 billion over the next three years to honour its contractual obligation. Operational changes at SAA are required urgently,” it noted.

Speaking to media ahead of the tabling of the Mid-Term Budget Policy Statement (MTBPS) in Parliament, Mboweni lamented the position government finds itself in.

“How long are we going to be on this flight path? Forever? I think not,” he said ahead of the tabling of the MTBPS.

The Minister stressed that operational and governance interventions are required as a matter of urgency.

The Minister was pleased that there is conversation around SAA gaining potential equity partners.

“I am pleased to learn that there are conversations involving SAA and potential equity partners, which would liberate the fiscus from this SAA sword of Damocles,” he said. – SAnews.gov.za

Government debt expected to rise to R4.5 trillion

The budget deficit is expected to widen to 6.2% of the Gross Domestic Product (GDP) in 2020, National Treasury said on Wednesday.

According to Treasury’s Budget Review document, this is mainly due to tax revenue shortfalls, lower economic growth and the Eskom bailout.

“In 2019/20, the main budget deficit is estimated to widen to 6.2% of GDP compared with the 2019 Budget estimate of 4.7%, mainly due to lower nominal GDP, tax revenue shortfalls and financial support for Eskom.

“Over the next two years, lower revenue, additional financial support for Eskom and higher debt-service costs widen the main budget deficit by an average of 2.2 percentage points,” National Treasury said, adding that the primary balance will narrow over time, reaching 1.4% of GDP in 2022/23.

“Provision for financial support for Eskom in the current year and over the medium term amounts to R161 billion.

“Excluding these provisions for Eskom, the main budget primary deficit improves by 0.9 percentage points to 1.4% of GDP in 2019/20, and narrows to 1.1% of GDP in 2022/23,” Treasury said.

National Treasury said, meanwhile, that gross loan debt is expected to increase from R3.2 trillion or 60.8% of GDP in 2019/20 to R4.5 trillion or 71.3% of GDP in 2022/23, mainly to finance the budget deficit.

“The key drivers of this increase remain the budget balance and fluctuations in the interest, inflation and exchange rates,” Treasury said.

While government remains committed to fiscal sustainability, there has been significant fiscal deterioration since the tabling of the 2019 Budget.

“This requires substantial spending reductions to stabilise debt. Measures to manage and reduce public-sector pressures and risks will be implemented over the medium term.

“Fiscal policy and the debt management strategy will work to mitigate risks to the outlook,” Treasury said. – SAnews.gov.za