Against the background of ten years of sluggish economic growth and the deepening Eskom financial crisis, there was little room for manoeuvre in Minister of Finance Tito Mboweni’s first budget.
Apart from substantial funding proposed for Eskom, the government’s spending plans are broadly unchanged. There were no surprises in tax policy. The debt-GDP ratio is now projected to stabilise at 60.2% in 2023/24 and the consolidated budget deficit will decline from 4.5% of GDP next year to 4.0% in 2012/22 – somewhat higher debt and deficit levels than earlier estimates, but still in “consolidation” mode.
The Treasury’s real GDP growth estimate of 0.7% in 2018 was slightly exceeded in the Stats SA GDP numbers published shortly after the budget. Real GDP growth came in at 0.8%, with increases in the production accounts in services and manufacturing, and declines in agriculture, mining, and construction.
However, the Stats SA nominal GDP estimate for 2018 is significantly lower than the Treasury number – R4.874 billion, compared with the Budget Review’s R4.958 billion. This results from substantial downward adjustments in Stats SA’s estimates of nominal GDP for the first three quarters of 2018, in effect signalling a downward revision in the implicit GDP deflator. Nominal GDP growth in 2018 was 4.7%, compared with the Budget assumption of 6.6%. Measured on the expenditure side of the national accounts, nominal GDP growth was just 4.1 in 2018, after averaging 7.5% over the previous six years.
The revenue projections for 2019/20 and subsequent years are therefore based on about 2 cent faster nominal GDP growth than was achieved in 2018. The Treasury’s GDP inflation projection for 2019 is 5.8%, falling to 5.3% by 2021. If GDP inflation continues to be nearer the 2018 outcome of 4% a year, then revenue will fall short of projections by a substantial margin, perhaps R100 billion by 2021/22.
The weaker exchange rate in the first quarter of 2019 will assist in raising GDP inflation somewhat, but this is not enough to compensate for the generally depressed outlook for nominal wages and salaries, company profits, trade and credit extension. In the absence of a substantial investment or export boost to the economy, further fiscal consolidation is likely to be required next year and beyond.
Much of the damage comes from the financial position of Eskom and other state-owned companies. Eskom’s balance sheet has been compromised by slow demand growth, cost-overruns in the new build programme and in maintenance and coal supply contracts, and – it now transpires – major design faults and early maintenance blunders at the new Medupi and Kusile plants.
Treasury officials have disclosed that they are projecting transfers of R10 billion a year to Eskom for the next ten years, equivalent in present value terms to a debt take-over of R150 billion. This may not be enough to enable Eskom to return to capital markets without a state guarantee. An annexure to the Budget Review is provided on “fiscal support for electricity market reform,” but it provides no details on the envisaged unbundling into separate generation, transmission and distribution divisions and the associated balance sheet restructuring.
In light of the recent collapse in available generation capacity it seems unlikely that the restructuring process will be concluded in the near term.
Alongside the Eskom allocations, the 2019 Budget provides an additional R3.5 billion for national roads over the next three years, R1.5 billion for the SA Post Office, R1.4 billion for the Limpopo Academic Hospital, R2.8 billion for Cape Town’s public transport network, and R2.8 billion to replace pit latrines in schools.
These are largely funded from reductions in allocations for compensation of employees and in transfers to PRASA’s commuter rail services, housing grants, and defence procurement.
Remuneration of employees comprises just over a third of consolidated government expenditure, or R627 billion in 2019/20. Transfers to households, mainly in social assistance grants, are the next largest category of spending, budgeted at R309 billion in 2019/20. Interest on debt is R202 billion in the year ahead, rising to R256 billion in 2021/22. Payments for capital assets are budgeted at R98 billion in 2019/20, or 5.4% of spending over the medium-term expenditure framework (MTEF) period.
Classified by function, education is the largest spending category, comprising 23.4% of non-interest allocations over the MTEF. Health services account for 13.9% and economic development 12.9%.
The spending budget reflects the prioritisation in previous years of social services, support for municipal functions and income support for households. In a context of stalled economic growth and an impending election, this is at best a holding operation in public service delivery.
Revenue measures in the 2019 Budget, similarly, reflect past commitments – implementation of a carbon tax, continuation of the youth employment incentive, higher taxes on fuel, alcohol and tobacco products, and clearing of the VAT refund backlog. The “health promotion levy” (on sugar content of beverages) was raised to adjust for inflation, but medical tax credits were not. Personal income tax thresholds have not been fully adjusted for inflation, yielding an additional R12.8 billion in revenue.
The Budget reflects, in sum, support for Eskom, continued fiscal consolidation, ongoing commitments to social services and strengthening the revenue base. Efforts to boost growth and give effect to the President’s jobs and investment summit aspirations therefore have to rely on other measures.
Several dimensions of the development challenge belong on this broader growth agenda: collaboration between government and business in investment promotion and industrial development, opening up of regional markets and more aggressive trade promotion, urban development and housing investment initiatives, private sector participation in infrastructure, labour market reform, and steps to improve longer-term policy certainty. Policy and development reforms of this kind would have greater prospects for success if the post-election administration were to concentrate economic planning responsibilities in a credible and transparent strategic advisory council with appropriate stakeholder representation and expertise.