An imminent downgrade is not expected by Finance Minister Nhlanhla Nene
This was a medium-term budget characterised by damage control.
There was the damage control needed to stem the violence that broke out in the parliamentary precinct during student protests against university fee increases, and the damage control the ANC needed to exercise as opposition party members were, yet again, kicked out of the National Assembly.
But in budget terms, it was specifically about controlling the damage caused by one item – a steep increase in pay for civil servants.
The wage hike the public sector finally won in June has come to haunt the treasury at a time when the odds are stacked against the country.
The economy is forecast to grow by 1.5% this year and by 1.7% and 2.6% in the next two years. This is a marked decline in the February budget forecast of 2% for this year, followed by 2.4% in 2016 and 3% in 2017.
Tax revenues have also been revised down, with a decline of R7.6-billion expected this year and a total shortfall of R35-billion in the coming years.
Alongside the weakening outlook for global growth, domestic constraints such as energy supply shortages, the labour relations environment and poor policy certainty and co-ordination weigh on the economy.
Finance Minister Nhlanhla Nene warned in February’s main budget that a higher than inflation increase for public sector workers would be a major risk to the government’s spending plans.
The increase has meant that an additional R64-billion must be found, which has not been budgeted for – an additional R12-billion in 2015-2016, R21-billion in 2016-2017 and R31-billion in 2017-2018.
Although the wage agreement was a nominal 7% for this year, followed by an increase in the consumer price index of 1% in the coming two years, it has resulted in an effective 10.1% increase in the wages and benefits of government employees this year.
Despite Nene being at pains to point out that the government has remained within its expenditure ceiling targets, it has achieved this with some technical tweaking of the nation’s books.
The wage settlement has played havoc with efforts to reprioritise government spending towards much-needed investment and away from spending on items such as salaries.
In a briefing to reporters ahead of delivering his speech on Wednesday, Nene conceded that the wage settlement has “crowded out” other spending priorities.
The technical adjustments the treasury has made to the expenditure ceiling now exclude payments that are directly and fully financed by dedicated revenue flows authorised by specific legislation, such as the skills development levy, as well as payments that arise from technical adjustments to the value of assets and liabilities.
They will also exclude the payments funded by the sale of financial assets, such as the R23-billion granted to Eskom and the R2-billion used to fund the Brics (Brazil, Russia, India, China and South Africa) grouping development bank, both of which are thanks to the government selling its stake in Vodacom.
These technical adjustments to noninterest expenditure – or the portion of spending that is not used to pay off government debt – will help keep expenditure in the range of R1.1-trillion in 2015-2016, R1.2-trillion in 2016-2017 and R1.3-trillion in 2017-2018.
But most of the costs of the wage agreement will be funded through savings, re-allocation of other funds and the contingency reserve, meant for events such as disaster relief.
Contingency reserves of R5-billion for 2015-2016 have been wiped out to pay the wage bill, while projected reserves of R15-billion and R45-billion in the next two years have been cut to R2.5-billion and R9-billion respectively.
The first “casualty”, as Nene put it, is staff headcount. Public sector employment will not expand over the next three years, the filling of vacancies must be postponed, and “some institutions may need to reduce the number of people they employ”.
Deputy Finance Minister Mcebisi Jonas told the Mail & Guardian that the rising public sector wage bill had to be managed, but it was also a symptom of the wider global and domestic pressures on the economy.
Nevertheless, fiscal consolidation was “a necessity, not a luxury”, said Jonas.
“The reality of the matter is that revenues are not going to be where they are supposed to be. There is no choice; we cannot break the expenditure ceiling. If we do, we are all doomed,” Jonas said, adding that “all [social] partners must begin to understand the importance of managing public finances differently, more effectively and efficiently and [with] a more consolidated approach to development and a common vision”.
Government employment figures have declined since 2012, according to the treasury, with employee numbers in national government departments dropping from 404 496 in 2012 to 402 748 in March this year. But this trend has been offset by the expansion of managerial personnel in administrative and policy departments in central government, according to the treasury.
A recent review revealed that, across 13 departments analysed, 1 158 posts were added in the past five years. Aggregate compensation across these departments more than doubled between 2008 and 2014, thanks to increased cost-of-living and occupation-specific dispensation adjustments, and the creation of new posts at higher salary levels, according to the treasury.
Meanwhile, staff headcount in the provinces declined from 923 553 in 2012 to 913 033 in March 2015.
But the changes have not necessarily resulted in smaller compensation budgets, the treasury noted, owing to above-inflation wage increases and occupation-specific adjustments.
Against this backdrop, the forecasts for the budget deficit have been revised from February. Although a deficit of 3.8% of gross domestic product (GDP) is forecast for this year, slightly down on February’s figure of 3.9%, the deficit is expected to worsen in 2016-2017 and 2017-2018, expanding to 3.3% and 3.2% respectively.
Government debt, meanwhile, is set to increase substantially, rising R600-billion in the coming three years, with the gross debt to GDP ratio forecast to rise to about 49% this year.
“South Africa has run out of options; it has run out of road,” said Professor Jannie Rossouw, head of the school of economic and business sciences at the University of the Witwatersrand. “It is not about what South Africa wants to do any more – it is about what it can do.”
Although Nene did not confirm tax increases for next February, he left the door open for this possibility.
Rossouw said, however, that hikes in personal income tax for high-income earners were unavoidable, although an increase in value-added tax was unlikely.
Although signs of spending cuts were encouraging, said Rossouw, there was ample room to make further cutbacks.
The size of the Cabinet, in particular, could be pared down, he argued, adding that by his estimates each ministry cost the country between R30‑million and R50‑million a year.
Nene said he did not believe there was cause for a further downgrade by any of the ratings agencies. “I do not expect a downgrade,” he said.
“We think as we are in a position of stabilising our debt and, as we continue to stay the course in terms of fiscal consolidation, there would be no reason for a downgrade.”
But some private sector analysts do not share this view.
Off the back of a “poorer than expected” medium-term budget, Investec chief economist Annabel Bishop said a one-notch downgrade from Fitch could happen in December.