By Kopano Gumbi, reporter at CNBC Africa
In his inaugural medium-term budget policy statement, Minister of Finance Tito Mboweni had the difficult task of explaining to South Africans and the broader investment community how each one of the levers– save, spend and grow– would be pulled, and in what ratio, to arrest fiscal wastage, reignite economic growth, stave off a sovereign downgrade and improve the lives of 56 million South Africans.
The South African economy has struggled to recover after over a decade of low and jobless growth. The downward spiral, partly initiated by the global financial crisis, was exacerbated by a failure to implement structural reforms, policy uncertainty and wide spread looting. GDP growth since 2010 has averaged at 1.8 percent. Lagging far behind continental peers of similar market sizes and economic activity. South Africa’s debt-to-GDP ratio is currently at an unsustainably high, 56.7 percent, with outlooks estimating up to 80 percent in the next decade, if nothing changes.
“Our problem is that we spend more than we earn. It is as simple as that,” said the minister, while delivering his speech in parliament. And while he tried to assure the public that this bad habit would soon be kicked, the government finds itself in the not so simple situation of needing to save, spend and grow the economy.
GDP growth has been revised down for the year to 0.5 percent. In February this year growth was forecast at 1.5 percent but was later revised down to 0.6 percent. Unemployment is at the highest it has been in over 10 years, currently at 29.1 percent. In this MTBPS, the government acknowledges that there is little chance that the 9.4 million unemployed adults will find a job.
Tax revenue collection continued to be constrained. The government expects a collection shortfall of R53 billion this year and R84 billion next year. The majority of tax, 38 percent, is collected from personal income taxes, 16.7% from company taxes and just over a quarter from Value-Added Tax.
“We must also wean state-owned companies off the national budget. They must learn to stand on their own feet,” said Mboweni during his speech. Currently this is easier said than done. The state has committed to spend an additional R60 billion this year to make sure delinquent state-owned entities remain going concerns.
Power utility Eskom, is seen as the biggest risk to the South African economy and will receive an extra R26 billion in this financial year. This is in addition to the R23 billion it received at the beginning of the year. Smaller state-owned entities will receive R11 billion and R450 million will be given to support an increase in student housing. On top of that, the National Prosecuting Authority will receive R1.3 billion to continue its work, including prosecuting state capture crimes. And the South Africa Revenue Services will receive R1 billion over two years.
Another state-owned entity which has failed to take off is struggling airline South African Airways and its subsidiary SA Express. The companies are currently discussing the possibility of a merger as well as equity buyouts from the private sector.
“We have essentially chosen to subsidise the middle class and wealthy flying around the country and other parts of the world,” said Mboweni, “rather than the ordinary workers who sit in old trains from the townships every day, often getting stuck and being late for work.” The minister has been clear in that he doesn’t see the value of having a state-controlled airline, and yet the national carrier will receive R5.5 billion in a bailout this year.
Savings efforts have been muted, the minister says that efforts to reduce spend and save have not materialised. Stricter measures around cabinet and provincial executive salaries have been proposed, as well as the controversial e-Toll system remaining as an additional revenue collection stream.
Whether the minister’s stern words will be enough to stave off a sovereign downgrade, remains to be seen. Moody’s is the last of the international ratings agencies to keep South Africa at investment grade. They are expected to release a note on our ratings on November 1, 2019.
“We shall return to this House next February with the nation’s beloved Aloe Ferox plant having flourished and show a government at work,” said the minister in closing.