It was clear from February’s Budget that National Treasury was facing huge fiscal pressures given lower than expected economic growth and lower revenue collection resulting in the imposition of cost-cutting measures. This was necessary to reign in spiralling government debt and debt service costs. However, the ACDP expects that finance minister Enoch Godongwana will announce a market-friendly medium term budget policy statement (MTBPS) this Wednesday, given the positive sentiment that the government of national unity (GNU) has generated. We further expect the minister to continue with fiscal consolidation measures yet announcing further steps to stimulate economic growth.
While low economic growth was largely caused by ongoing load shedding and severe challenges with logistics, both rail and ports, active steps are being taken to solve these issues. The country has experienced more than 200 consecutive days without load shedding and the private sector is assisting to solve the logistics challenges.
The only long-term solution to government’s debt spiral is a rejuvenated, growing economy, premised upon stabile energy provision and a vastly improved logistics network. We trust that improved economic growth will be achieved under the GNU and believe that with the right policies and positive investor sentiment, GDP growth of 2% plus can be achieved over the medium term. The country is already seeing positive developments, with reduced fuel prices, reduced inflation and declining interest rates, a strengthening currency and increased investor interest both from a domestic as well as international perspective (with the Johannesburg Stock Exchange reaching record highs).
The ACDP expects fiscal consolidation to continue by containing spending growth below CPI going forward. The current tax collection rates however indicate that R15bn –R20bn less tax will be collected in this tax year. This may be partially covered by the tax windfall as a result of people accessing part of their pensions under the two-pot retirement system. It is estimated that an additional R10bn –R15bn will be collected as a result – more than the R5bn estimated by National Treasury.
The MTBPS will provide greater clarity as to whether fiscal consolidation is achievable. It will also provide details on steps to improve economic growth, as well as the implications for service delivery of the cost containment measures.
The cost containment measures, while necessary to stabilise the debt to GDP ratio at 75% next year, are having a very detrimental impact on service delivery, including crime prevention, health and education services. This will need to be addressed.
Pressure on government spending is increasing with additional funding requests from Transnet (presently using a R47bn guarantee framework which is likely to run out soon, necessitating a direct transfer or increased guarantee next year), and the extension of the social relief of distress grant (SRD). In addition, while it is clear that the National Health Insurance is unaffordable in its present form, there are plans for its implementation in the future, causing much dissent in the GNU. Furthermore, aspects of the contentious Basic Education Laws Amendment Bill, such as making Grade R compulsory and addresses school infrastructure backlogs, and the provision of learner transport will result in a significant budget shortfall (with estimates as much as R130bn) over the medium term. The ACDP believes that the implementation of compulsory Grade R should be postponed until funds are available.
The escalating wage bill is another source of concern. While National Treasury previously estimated an annual average increase of 4.5% over the medium-term, public-sector unions are requesting a 12% pay increase, while the government is offering just 3%. The Reserve Bank has estimated that headline CPI will average 4.3% over the medium term. It is estimated that a 5% wage escalation will add R3bn- R6bn to the national and provincial wage bill. Anything higher will place further funding pressure on the fiscus.
The ACDP does not support tax increases, given hard-pressed households and businesses. We believe there are other ways of cutting government expenditure in ways that don’t affect service delivery. One way is to reduce administrative costs by amalgamating various departments and ministries.
SARS can also potentially assist by reducing the tax gap, which is the difference between taxes legally owed and taxes collected. It is estimated that the tax gap is about R300bn, and SARS, by merely collecting 10 per cent of what is due, would contribute an extra R30bn to the fiscus.
In addition, the ACDP has always said that billions of rands of stolen state funds can and should be recovered by further capacitating law enforcement and prosecution agencies, including the Hawks, SIU, and NPA (which includes the Investigating Directorate Against Corruption and the Asset Forfeiture Unit). These additional funds can also help balance the books.
The ACDP will be closely monitoring Minister Godongwana’s plans on dealing with these fiscal pressures when he tables the medium-term budget policy statement in Parliament this coming Wednesday, the first under the GNU, which has positively changed the narrative about the country.
