“We can’t spend what we don’t have- - “

Finance Minister, Pravin Gordhan, introduced only limited tax hikes in a 2016 Budget framed primarily by an acceptance that government “cannot spend money we do not have” and “cannot borrow beyond our ability to repay”.

The need to accelerate “fiscal consolidation” emerged as the overarching theme, with the improvement in the Budget balance to be shared between tax increases of R18.1-billion in 2016/17 and expenditure cuts of R15-billion. In addition, the expenditure ceiling had been lowered by R10-billion in 2017/18 and by R15-billion in 2018/19 mainly by reducing “public sector compensation budgets”, or the wage bill.

In addition, debt – which besides the wage bill, was viewed as the other main pressure point in the Budget – would be stabilised at 46.2% in 2017/18, which was below the previous expected peak of 49.4% of gross domestic product (GDP) in 2018/19. Any breach above the 50% level was seen as a likely trigger for a downgrade to South Africa’s investment rating.

Nevertheless, debt-service costs remained the fastest-growing item of expenditure, consuming 12c of every rand of State revenue. Debt-servicing costs rose to R129-billion in 2015/16 and would surge to nearly R179-billion in 2018/19. Over the coming three years, debt-servicing costs would increase at an average yearly rate of 11.4%, well ahead of basic education (7.4%), health (7.6%) and even post-school education (7.9%).

Addressing lawmakers in Cape Town, Gordhan – who was reappointed to the critical portfolio in mid-December after markets and society reacted with extreme negativity to President Jacob Zuma’s decision to remove Finance Minister Nhlanhla Nene on December 9 and replace him with the little-known David ‘Des’ van Rooyen – made prudence the watchword.

“Until we can ignite growth and generate more revenue, we have to be tough on ourselves,” Gordhan said in an address geared as much to his government colleagues as it was to the credit-rating agencies and citizens.

Despite the partial unwinding of the Van Rooyen decision four days after it was made, Africa’s most advanced economy was nevertheless still at risk of being downgraded to ‘junk’, with the country’s investment grade rating having been placed on negative watch even ahead of what became known as ‘Nenegate’.

Making specific reference to Nene, he reiterated the fired Finance Minister’s mini-Budget statement: “If we do not achieve growth, revenue will not increase. If revenue does not increase, expenditure cannot be expanded.”

Growth below 1%

However, China’s slowdown and the associated decline in commodity prices were exacting a heavy toll, evidenced by successive downward revisions to South Africa growth outlook by, among others, the International Monetary Fund and the South African Reserve Bank, which both did not see South Africa expanding by more than 1% in 2016.

Likewise, the National Treasury lowered its growth forecast for the year from 1.7% in October to just 0.9%, while announcing that the South Africa economy grew by only 1.3% in 2015. The forecasts for 2017 and 2018 where also lowered from 2.6% and 2.8% respectively, to 1.7% and 2.4%.

This backdrop of weakening growth, rising inflation and the spectre of mid-year downgrades by Fitch and Standard and Poor’s had been compounded by a fall in the credibility of government leaders and rising mistrust in government’s ability to address the current social and economic threats.

Gordhan, nevertheless, made a strong appeal for citizens to unite behind government’s fiscal-consolidation effort, as measured primarily by the Budget balance and the country’s debt position.

“The joint actions we need, will not always be easy. All too often, bureaucrats and business people speak past each other; the needs of the young are not the same as those of the elderly; the rhythms of the township differ from those of the suburb. Race, class and language differences interfere with progress, even when we have shared aspirations. We need to bridge these divides,” he said, adding that adversity could be turned into opportunity.

Emboldened by recent high-level interactions with business leaders designed to avoid a downgrade, he said the weaknesses that created policy uncertainty could be addressed. “Confidence and shared understanding have been reinforced.”

Government-business working groups had also been established to pursue a collaborative initiative to combat corruption and abuse of tender procedures; to create a new fund to accelerate small and medium-sized enterprise development; and support measures to build investor confidence and contribute to social cohesion.

“We have avoided reckless policies which might have dragged us into recession or reversed the capital flows we need. We have a sound macroeconomic and fiscal framework, and the will to work together for faster and inclusive growth.”

Consolidation commitment

The Budget deficit was forecast to come in at 3.9% of GDP in 2015/16, which was slightly worse that the 3.8% outlined in October. However, Gordhan said it would come in at 3.2% in 2016/17, 2.8% in 2017/18 and 2.4% in 2018/19; figures that represented an improvement on the 3.3% and 3.2% outlined in October for 2016/17 and 2017/18 respectively.

Revenue of R1.32-trillion in 2016/17 would, therefore, fall short of expenditure of R1.46-trillion by R139-billion, with the gap at R158-billion for the 2015/16 fiscal year, with expenditure of R1.38-trillion against revenue of R1.22-trillion.

The lower growth outlook would impede revenue collection, with the 2015/16 projection of R1.08-trillion, revised lower by R11.6-billion. A consolidated revenue target of R1.32-trillion was set for 2016/17, or 30.2% of GDP.

To raise the additional R18.1-billion sought for 2016/17, R9.5-billion would be realised through higher excise duties, the general fuel levy and other environmental taxes, while adjustments to capital gains tax and transfer duty would raise R2-billion more. An amount of R7.6-billion will be raised as a result of limited fiscal drag relief, less R1.1-billion for an increase in medical scheme tax credits.

The hikes would include an increase in the monthly medical tax credit allowances; a 30c/l hike in the general fuel levy and increases of between 6% and 8.5% in the duties on alcoholic beverages and tobacco products. Also outlined was the introduction of a tax on sugar-sweetened beverages from April 1, 2017; the introduction of a tyre levy to finance recycling programmes, as well as increases in the incandescent globe tax, the plastic bag levy and the motor vehicle emissions tax.

Cutting back?

Gordhan, however, also outlined the cuts that government planned to make over the coming three years, unveiling cost-containment measures, including:

-          Restrictions on filling managerial and administrative vacancies, subject to review of human resource plans and elimination of unnecessary positions.

-          Reduced transfers for operating budgets of public entities. - Capital budgeting reforms to align plans with Budget allocations while strengthening maintenance procedures.

-          Mandatory use of the new e-tender portal to raise procurement transparency and access to reference prices for a wide range of goods and services.

-          A national travel and accommodation policy and instructions on conference costs. - New guidelines to limit the value of vehicle purchases for political office-bearers.

-           Renegotiation of government leasing contracts.

-          New centrally negotiated contracts for banking services, information and communication technology infrastructure and services, health technology, school buildings and learner support materials.

“Initiatives of the Chief Procurement Officer will be extended to include monitoring of State-owned companies’ (SoCs') procurement plans and supply chain processes, and reviews of contracts above R10-million to ensure value for money. Centrally negotiated contracts will be mandatory with effect from April 2016.”

There had been an attitudinal shift, though, with SoCs no longer viewed as “sacrosanct”. In addition, government was increasingly open to pursuing partnerships with the private sector, including co-investing in projects and enabling private entities to take minorities positions in certain entities.

The asset base of State-owned entities stood at over R1-trillion, equivalent to about 27% of GDP and government had provided support, in the form of guarantees, which now totalled R467-billion, or 11.5% of GDP.

“The balance sheets of several entities with extensive infrastructure investment responsibilities are now stretched to their limits . . . Yet we need to accelerate infrastructure investment in the period ahead. So we must broaden the range and scope of our co-funding partnerships with private sector investors. This requires an appropriate framework to govern concession agreements and associated debt and equity instruments, and appropriate regulation of the market structure.”

Future restructuring would be guided by the recently released report of the Presidential Review Commission on State-Owned Enterprises, which indicated that the mandates of some entities overlapped, while others were in perpetual financial difficulties.

“So we must take decisive steps to ensure that they are effectively governed and that they contribute appropriately to the attainment of the National Development Plan,” Gordhan said.

Source: Engineering News

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