/ 20 February 2019

Eskom’s plight the fault line in Tito Mboweni’s 2019 budget

Finance Minister Tito Mboweni delivered a tough
Mboweni laid out a series of tax changes aimed at raising R15-billion in 2019/20. (David Harrison)

Efforts to fix beleaguered power utility Eskom were a key focus in the budget Finance Minister Tito Mboweni’s delivered on Wednesday, which outlined further deterioration in government’s financial position and the difficult choices the state must confront.

Although the budget made provision for R69-billion in additional funds to Eskom over the next three years, Mboweni did not aid the utility with a debt swap, in which the state would have taken an estimated R100-billion of Eskom’s debt onto its own balance sheet.

“Pouring money directly into Eskom in its current form, is like pouring water into a sieve,” Mboweni said. “I want to make it clear: the national government is not taking on Eskom’s debt. Eskom took on the debt. It must ultimately repay it.”

Instead, the government is provisionally providing R23-billion each year, over the next three years, to enable Eskom to meet its debt commitments and undertake its reconfiguration. This reconfiguration was announced by President Cyril Ramaphosa at his State of the Nation Address. This will see Eskom split into three separate business units — generation, transmission and distribution.

However, this fiscal support is conditional on the appointment of a chief re-organisation officer (CRO) that will be jointly appointed by the ministers of finance and public enterprises, said Mboweni. The CRO will have the explicit mandate of delivering on the recommendations of the presidential task team appointed by Ramaphosa to deal with the crisis facing Eskom. Announcements in this regard will be made in the coming weeks.

Despite the emphasis on the conditions placed on the state’s assistance, the provisions made for Eskom are reflected sharply in the government’s finances — including contributing to the state breaching its spending ceiling in the coming years.

The budget proposes additional spending of R75.3-billion over the next three years, of which R69-billion is the provisional allocation for reconfiguring Eskom. Although the expenditure ceiling remains intact for the current 2018/19 financial year, to help accommodate the additional spend, the state has revised its expenditure ceiling upwards by R14-billion in 2019/20, R1.3-billion in 2020/21 and R732-million in 2021/22.

Slow economic growth — as South Africa recovers from the technical recession of 2018 — has also impacted on the state’s finances. The treasury revised its forecast for economic growth to 1.5% in 2019.

The poor growth as well as continued VAT refund backlogs has meant that the projected tax revenue shortfall for the 2018/19 year will be R42.8 billion — up R15.4-billion from the estimates of made in the October medium term budget policy statement (MTBPS).

As the gap between what government earns in taxes and what it spends widens, its reliance on debt to fund the difference increases. The main budget deficit is now expected to rise to -4.7% of GDP in 2019/20, 4.5% in 2020/21 and -4.3% in 2021/22.

The state’s gross debt to GDP ratio meanwhile is set to rise to 56.2% in 2019/20, 57.8% in 2020/21 and 58.9% in 2021/22. Gross debt is projected to stabilise at 60.2% of GDP in 2023/24. In the coming year, according to Mboweni, interest payments on this debt will amount to R209.4-billion — or R1-billion a day.

Mboweni laid out a series of tax changes aimed at raising R15-billion in 2019/20, with further measures aimed at raising R10-billion in 2020/21 to be announced in the main budget next year.

The main measures to raise additional revenue include not adjusting personal income tax brackets to account for inflation – known as bracket creep – which is expected to raise R12.8-billion. An increase in the fuel levy by 29c/litre is also planned, which will incorporate the introduction of a 9c/litre carbon tax on fuel. Increases in sin taxes on alcohol and tobacco products by between 7.4% and 9% are also coming.

Mboweni came out strongly against the burden Eskom and other state owned entities place on the fiscus – referencing the famous line from Charles Dickens’ Oliver Twist: “Please sir, may I have some more?”

“The SOEs pose a very serious risk to the fiscal framework,” said Mboweni.

On top of the assistance for Eskom other SOEs notably SAA, SABC and Denel have asked for state support to continue operating. As a result, the contingency reserve has been revised up by R6 billion in 2019/20, and any funding provided will be offset by the sale of non-core assets.

“Isn’t is about time the country asks the question: do we still need these enterprises? If we do, can we manage them better? If we don’t need them what should we do?,” he asked.

As part of its plans for SOE reform the government is aiming to tighten its guarantee rules. If a state owned entity seeks further guarantees it will be required to appoint a CRO in concurrence with the national treasury and its bond holders, who will undertake a full operational and financial review, Mboweni said.

“Restoring our finances and fixing our state owned entities will take great courage. But it can be done,” he said

On a more positive note Mboweni also announced concerted efforts to reign in state spending particularly the state’s wage bill and boost economic growth enhancing efforts.

The national and provincial compensation budgets will be reduced by R27-billion in the coming three years. The first step in the process will allow older public services to take early retirement packages. It will be accompanied by limits on overtime, bonus payments and pay progression, said Mboweni.

The state has also allocated R5-billion for the creation of an infrastructure fund, in partnership with the private sector, development finance institutions and multilateral development banks. The fund will amongst other things, improve the speed and quality of spending, and reduce costs in public infrastructure.

Read Finance Minister Tito Mboweni’s 2019 budget speech:

Budget Speech 2019 — Financ… by Mail & Guardian on Scribd