Finance 101: The Medium Term Budget – There’s Hope But There Will Also Be Pain
The new Minister of Finance, Nhlanhla Nene, delivered his maiden budget speech in late October. It was the Medium Term Budget speech which looks at government finances over the next three years.
Setting the scene – a difficult task
The Minister faced a difficult task with gloom over our disappointing economic performance (forecasted GDP growth has been cut from 2.7% in February to 1.4% now), industrial unrest, electricity shortages, growing government debt and ratings downgrades on South Africa’s ability to repay its debt.
Just five years ago as the first world entered a severe recession, emerging markets like South Africa were in a strong position – low debt and good economic growth. We responded to the global recession by stimulating economic activity via rapidly increasing government expenditure.
This policy is clearly no longer affordable. 56% of government expenditure is on social welfare and salaries and if the country continued on its spending path, these costs would consume 100% of state spend in the next ten years.
Ratings agencies have downgraded our debt and we are now just above junk status – if South Africa’s debt rating falls to this level it could potentially add 1.5% cost to our debt.
In essence we are at a tipping point.
Minister Nene has recognised the difficulties the economy is facing and has unveiled measures to improve government finances. These include -
- Freezing the government headcount – new posts will have to come from current staffing
- In addition, unfilled government posts have been abolished
- A reduction in spend on entertainment, travel, communications, catering and consultants
- Government salaries can rise by no more than 6.6%
- Funding to State Owned Entities such as Eskom, SAA and SABC will be viewed differently. Stricter controls will be placed on them and any funding required by them will be debt neutral as it will come from the sale of government assets
- There will be tax increases. These will be announced in the February budget. These will come from recommendations from the Davis Committee on taxation
- Social spend on grants, health care and education will stay as is.
The effect of these actions will be to reduce government expenditure by R25 billion and increase revenue (tax increases) by R27 billion. This will reduce the budget deficit to below 3% of the budget by 2017. Economic growth will rise to 3% in this timeframe.
Hope amidst difficulties
- The fact that the bond market improved and the Rand remained stable indicates that global markets approved of the budget
- The Minister stressed that the budget was drawn up within the framework of the National Development Plan. This is accepted as a credible long term plan to improve investment, economic growth and jobs in South Africa
- The consumption spend economic stimulus programme is being replaced by one that emphasises investment – in the medium to long term this will enhance economic growth
- It has been a long time since government mentioned privatisation and it will be interesting to see what flows from government’s commitment to sell assets to fund parastatal entities like Eskom
- The budget is “collectively owned”, so the Minister has government consensus which gives more credibility to the budget
- The first big test will be government salaries next year. Unions are pushing for a 15% increase but the Minister clearly stated that salaries cannot go up by more than 6.6%.
Although no one likes tax increases, this budget was a strong statement based on common sense and reality.