Mid-term budget: Gigaba brutally honest on economic woes
Malusi Gigaba’s first medium-term budget policy statement as finance minister was surprising in its brutal honesty about South Africa’s poor economic outlook. But despite offering insights into emergency measures to plug the budget gap, it provided little detail about how the treasury would turn the situation around.
“It is not in the public interest, nor is it in the interest of government, to sugarcoat the state of our economy and the challenges we are facing,” said Gigaba when delivering the policy statement – dubbed the mini-budget – in Parliament on Wednesday afternoon. “Only when we understand these challenges fully and candidly will we know what to do and can decide what course we must take in addressing them, as well as trade-offs we must make in the national interest.”
He said that now, more than ever, improving the economic growth outlook over the medium term is the biggest challenge.
“It cannot be overstated that the budget’s ability to advance constitutional and development objectives relies on economic growth as a prerequisite,” Gigaba said.
He pointed to the ongoing implementation of a 14-point plan to kickstart growth and to certain crisis management measures. But it was clear from his speech that the country’s economic outlook remains particularly ominous.
Gross domestic product per capita has declined for two years in a row. This sluggish growth will impact on tax revenues – which are estimated to fall R50.8-billion short of the February’s budget estimate. Added to this, appropriations of R13.7-billion to recapitalise the embattled SAA and the South African Post Office – although some of it was sourced from the government’s contingency reserve – will see the budget deficit widen to 4.3% of GDP in the current financial year, against an initial target of 3.1%.
Debt servicing remains the fastest-growing cost and will account for nearly 15% of the main budget revenue by 2020-2021.
The treasury has revised its economic growth projections for 2017 downwards from 1.3% to 0.7%. It’s expected to reach 1.9% in 2020 – assuming the status quo prevails.
The government’s short-term options to reverse the situation are limited, the minister said, adding that ensuring that fiscal consolidation is not derailed will not be pain-free.
To avoid a breach of its expenditure ceiling – thanks to the recapitalisation of SAA and the post office – he confirmed that the state will be disposing of its Telkom shares, with an option to buy them back later, the minister said. “If we cannot maintain the fiscal framework now, what confidence can investors have for us to do it in future? If government is sitting on assets, let’s use them to prevent this,” Gigaba said, elaborating on the issue during a media briefing.
He said disposing of assets to fund future funding gaps need not be reserved for noncore assets only, as long as there is private-sector participation.
The poor state of the country’s state-owned companies featured prominently in the mini-budget. Gigaba noted the worrying state of these enterprises, which are powerful levers to drive economic transformation but have been plagued by governance failures and corruption.
“As the shareholder, we are tired of being dragged into crises by those we employ to govern and manage state-owned companies. This must end. The trend of [parastatals] seeking bailouts to finance operational expenditure, inefficiency and waste must also be brought to an end,” said Gigaba.
As such, the treasury will “in due course” make proposals to make the the government guarantee framework more stringent, he said. Boards of state-owned enterprises will be looked at, and the government will appoint a new Eskom board before the end of next month, he added.
More imminent is the treasury’s pronouncement on plans to consolidate aviation assets and bring in a strategic equity partner, which will happen after the treasury meets with the new board of SAA, Gigaba said. He added that such a partner can play an important role in turning SAA around and unlocking value for the fiscus. The minister maintained that retaining a national air carrier was in the national interest.
Carbon tax is back on the map too. “Cabinet has approved the release draft of the Carbon Tax Bill to Parliament for formal consideration and adoption,” the minister said.
The question of a nuclear build programme was not addressed in the policy statement, but at the media briefing Gigaba said the budget and the country could not afford nuclear power, nor did it need it given its excess power supply.
The question of free higher education is now at the centre of the transformation agenda, Gigaba said. Already, the sector’s budget is the fastest-growing over the medium term, rising from R77-billion this year to R97-billion in 2020-2021. However, the president has been given the final report from the commission into the feasibility of free higher education, and the treasury awaits his determination and announcement in this regard, Gigaba said, noting that further announcements will be made in the 2018 budget speech.
Importantly, the policy statement appears to affirm the treasury’s commitment to a progressive approach to the division of revenue plans to maintain social spending and infrastructure investments, despite the difficult fiscal environment. Any new policy initiatives will need to be matched by new or higher taxes, Gigaba said.
During the media briefing, Gigaba said he unable to comment on any possible tax increases next year as, unlike the February budget, the medium-term policy statement does not address new tax proposals. Any new taxes announced in February would still need to follow due process. “We need to look at them comprehensively,” he said.
Slow progress and poor co-operation has given rise to a lack of trust among stakeholders, and policy contestation has compromised the economy and confidence, the minister said. He implored stakeholders to find common ground to resolve the impasse over the mining charter.
Gigaba said delivery on the 14-point economic recovery plan, announced by the Cabinet in July, had been commendable. However, the scale and pace of structural reform has to increase to realise the goals of the National Development Plan, he said.
“Procrastination and dithering must end; we must demonstrate decisive leadership,” said Gigaba. “We cannot expect the economy to slow down to the speed of government; government must speed up to meet the needs of the economy.”
Importantly, the next phase of growth must be characterised by radical economic transformation, Gigaba said. “It is not perpetual fiscal consolidation that South Africa needs; it is new path altogether.”