There’s a fierce economic wind blowing and Finance Minister Nhlanhla Nene has trimmed the sails of the South African ship.
Addressing Parliament in his first medium-term budget policy speech, Nene spelled out a decisive plan for fiscal change.
Because of increasing current account debt, rising inflation and stagnating economic growth, ”fiscal consolidation can no longer be postponed”, he said in the medium-term budget policy document.
He outlined a threefold proposal for change, which is likely to touch almost every South African:
- The government will lower its consumption expenditure by R25-billion over the next two years;
- The overall government spending ceiling will be lowered; and
- Tax revenue will be increased by at least R27-billion over the next two years.
Despite slowed economic growth, this means tax increases are imminent.
The minister spelled out the details of the economic crossroads facing the country. During the recession, the government had adopted a counter-cyclical approach to stimulate spending but this was no longer possible. And the economy was expected to grow by only 1.4% this year, a stark revision from the originally anticipated 2.7%.
The main budget deficit remains at 5% of gross domestic product (GDP), with the country’s debt-to-GDP ratio the highest among its emerging market peers. Although the government has not exceeded its expenditure ceiling for the past three years, South Africa’s total debt stock is projected to increase to R2.4-trillion by 2017.
The country finds itself at a crossroads where the previous policy approaches will no longer yield the desired results: ”Over the last five years, expansionary policies cushioned South Africa from the effect of the global crisis,” he said in the document. But ”public debt is now approaching the limits of sustainability. Debt-service payments consume a growing share of the national budget, narrowing the space to expand public services and investment.”
”Sustaining deficits while the economy is unresponsive can worsen the current account deficit, push up inflation and interest rates, and reduce the competitiveness of the currency. Over time, these conditions undermine growth and employment.”
In the medium-term budget policy statement in 2012, the then finance minister Pravin Gordhan said that, if the economic and fiscal outlook deteriorated, the government would need to rethink its expenditure and revenue plans. Two years later, ”that turning point has been reached”, Nene said.
Reining in government expenses
Nene announced several ways in which ”budgets for nonessential goods and services will be frozen” for the next two years.
Planned expenditure on travel and subsistence would be cut by R555-million across all national departments.
Advertising and communications budgets would be docked by R240-million, spending on consultants would be reduced by R370-million and catering costs would come down by R150-million.
Speaking at a press conference just before the speech, the minister said these cuts would not hinder service levels to the public. ”When we cut goods and services, that will not necessarily harm service delivery,” he said.
The government would withdraw funding for vacant posts. ”We are saying, if they haven’t been filled in the past few years, why do you want to keep them still vacant and funded?” Nene said.
The public wage bill, currently R439-billion, is also likely to be contained. With government officials collectively demanding a 15% wage increase when multiyear wage agreements lapse next year, the government has said that anything higher than inflation plus 1% would be unsustainable and ultimately lead to the need to cut jobs or other cost-containment methods.
Nene said the treasury and public sector workers were coming from ”different opening bids”. Government employees, when making wage demands, would need to appreciate that their employer was operating in a very constrained fiscal environment.
Tax increases down the line
South Africans can look forward to some form of tax increase in the coming months.
Policy and administrative reforms are expected to raise R12-billion in 2015-2016, R15-billion in the following financial year and R17-billion in the year after that.
But Nene would not be drawn on for details. ”The only time we announce tax changes is during the [annual] budget speech [in February],” he said.
According to Izak Odendaal, an investment analyst at Old Mutual Wealth, this could be done in three ways.
Firstly, value added tax (VAT) exemptions could be eliminated. ”Currently, a range of fresh food items are VAT free, benefiting rich and poor alike,” he said. These could be scrapped.
Secondly, remaining loopholes could be closed and tax avoidance schemes could be targeted, Odendaal said. In particular, the ”off-shoring” of some companiesâ€™ tax liabilities could be scrutinised.
Thirdly, another form of wealth tax could be introduced â€“ something that could have been implied in the budget document, which stated that ”the proposals [to tax changes] will enhance the progressive character of the fiscal system”.
Charming the ratings agencies
The combined effects of tightening up spending and increasing tax would mean ”a few years of pain” for South Africans, Nene said.
”It’s a call to action to all of us to take the pain,” he said. It was ”not very bad, not very heavy pain”, but was unavoidable to narrow the budget deficit, stabilise debt and begin to rebuild fiscal space.
The moves are also likely to appease international credit rating agencies, which have recently viewed the South African outlook with concern.
With Standard & Poor downgrading the country’s sovereign rating to one level above junk status and Moody’s August decision to lower the ratings of South African banks, the country can little afford another credit rating reduction.
And Nene’s speech reflects his cognisance of this.
”Ratings agencies will rate us on what we are doing to keep our country afloat,” he said. ”It’s important that ratings agencies find us managing our economy.”