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2019 MTBPS Tabled in Parliament

October 30, 2019

National Treasury

30 October 2019

INTRODUCTION

“The winter has been long, but we must prepare for spring and reposition the Republic to grow and to thrive. We need to plant good seeds for our country, both now and for future generations.”

The finance minister, Tito Mboweni, emphasised this while delivering the 2019 Medium Term Budget Policy Statement in the national assembly.

He added that action needed to be taken now.

“We cannot wait any longer. If we want a successful harvest, we must act today.”

The minister indicated that treasury’s task is to “chart a course that is strategic, sober, careful and inclusive”.

Economic performance in South Africa needed to be speeded up.

With reference to the economic policy paper titled “Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa”, released in August 2019 for comment, the minister highlighted some important growth ingredients including an efficient and capable state; prudent fiscal and monetary policy; a competitive and flexible exchange rate; a trade regime promoting open and beneficial trade; a reimagined industrial strategy; reorganizing Eskom and other state-owned companies; lowering barriers to entry; prioritising job-creating sectors, such as agriculture and tourism; an overarching legal framework with an independent judiciary and strong property rights and a well-functioning financial sector.

With regard to Eskom, the minister stressed that government could no longer continue throwing money at the state-owned enterprise (SOE).

Going forward, new cash flow support will no longer be equity but will be in the form of loans.

The minister confirmed that operational and governance interventions are urgently required at South African Airways and a reconfigured approach to the Gauteng Freeway Improvement Project will be determined by the finance and transport ministers after consultation with the premier of Gauteng and the executive council.

SOEs that require support from the fiscus will be subject to certain pre-conditions and principles including that government as a shareholder commits to the highest standard of corporate governance; managers, and their teams, to not receive bonuses or salary increases when they fail to meet basic financial targets and service objectives and businesses with outdated business models are a major fiscal risk and should be shut down.

ECONOMIC OUTLOOK

Local economic growth is forecast to reach only 0.5 per cent in 2019, rising gradually to 1.7 per cent by 2022.

This growth level is insufficient to support meaningful increases in employment and welfare.

At the global level, economic growth is slowing mainly due to mounting trade conflict – in both developed and developing economies.

Global economic growth sits at its lowest level since the 2008 financial crisis.

In the local economy, inflation is expected to remain within the target band of 3 to 6 per cent over the medium term with the current account deficit remaining at 3.5 per cent.

According to national treasury, investment is expected to recover gradually.

However, short-and medium-term reforms are urgently required to improve economic performance over the next few years.

Per capita gross domestic product (GDP) is expected to stagnate over the medium term.

Poor growth performance flows from structural challenges, economic shocks and policy uncertainty.

Treasury calls for certain reforms to be implemented without delay including speeding up progress on the Yamoussoukro open skies agreement to reduce the cost of flying to South Africa, supporting tourism by cutting red tape and the regulatory burden for entrepreneurs and small businesses, granting licences for small-scale power generation projects, commencing with the fifth round of the Independent Power Producer (IPP) programme for renewable energy, issuing guidelines and enforcing open-access conditions to support the rapid expansion of fibre infrastructure and developing a single platform to register a business and automate the deeds registry.

GLOBAL OUTLOOK

Economic growth has weakened in both developed and developing countries.

According to the International Monetary Fund (IMF), trade tensions will reduce growth by 0.8 percentage points in 2020.

Expected growth in the euro area has been revised down since January by 0.4 and 0.3 percentage points in 2019 and 2020 respectively due to uncertainty over Italy’s finances and lower external demand in Germany.

In China growth continues to slow impacting local resource exporters.

Compared to average 2018 levels, South Africa’s risk premium has risen by about 0.3 percentage points contrasted with an average decline of 0.3 percentage points in other developing countries.

DOMESTIC OUTLOOK

South Africa’s growth outlook has declined significantly since the 2019 Budget.

The first half of the year saw flat growth as the rebound in the second quarter offset the contractionary effects of power outages and prolonged strike action in the first quarter.

Growth is forecasted to be 0.5 per cent in 2019 and only 1.2 per cent in 2020.

As a result of the fiscal deficit, borrowing costs are expected to remain high.

Replacement investment in key sectors will support modest employment, wage and investment gains over the medium term.

The current account deficit is expected to remain at 3.5 per cent of GDP over the next three years due to low investment and import growth.

Consumption spending grew by 1 per cent in the first half of 2019 compared with the corresponding period of 2018.

However, spending on non-essential items has fallen dramatically due to rising unemployment, successive fuel price hikes and tax increases.

Investment contracted by 1.6 per cent in the first half of 2019, offset by a 15.2 per cent recovery in private-sector investment in the second quarter.

Treasury holds the view that a gradual improvement in business confidence will support increased investment.

As regards unemployment, the official rate has increased to 29 per cent, up from 27 per cent a year ago.

Inflation is expected to hover at the midpoint of the 3 to 6 per cent target band.

Inflation is forecast to increase gradually as a result of higher electricity tariffs and higher meat and grain prices.

Administered price inflation will remain high, with electricity and water producer price inflation reaching 14.6 per cent in July 2019.

FISCAL POLICY

Public finances have deteriorated since the 2019 Budget mainly due to lower growth and tax revenue, as well as increased support to SOEs.

The consolidated deficit averages 6.2 per cent over the next three years, with debt projected to reach 71.3 per cent of GDP by 2022/23.

Main budget non-interest spending will increase by R23 billion in 2020/21 and reduce by R8.2 billion in 2021/22 as compared to the 2019 Budget.

This is due to increased financial support for Eskom, the reversal of anticipated savings on compensation and reductions in other spending.

In order to stabilize the debt-to-GDP ratio over the next ten years, large additional measures will be required.

Government is proposing a fiscal target: a main budget primary balance (revenue equal to non-interest expenditure), excluding financial support for Eskom, by 2022/23.

This will require reductions to wage bill growth as well as additional tax measures under consideration.

Support for Eskom includes R49 billion in the current year and an expected R112 billion over the MTEF.

Main reductions made have been to goods and services and transfers, while wage growth is revised down marginally due to lower projected CPI inflation.

Non-interest spending has increased by R23 billion in the current year, mainly due to the Special Appropriation Bill that allocates R26 billion to Eskom.

According to treasury, additions to spending are offset by the use of the contingency reserve, provisional allocations, projected underspending and declared unspent funds.

Additional funds in the current year include support to South African Airways (R5.5 billion) and the South African Broadcasting Corporation (R3.2 billion).

Denel and South African Express receive funding amounting to R1.8 billion and R300 million respectively.

Real non-interest spending grows by 1.2 per cent in 2020/21 and 0.1 per cent in 2021/22.

The cost of servicing government debt is expected to exceed 2019 Budget estimates by R1.5 billion in 2019/20, R8.7 billion in 2020/21 and R17.2 billion in 2021/22.

In terms of the expenditure ceiling, it is lower by R2.9 billion in 2019/20, R9 billion in 2020/21 and R16.5 billion in 2021/22 as compared to the 2019 Budget.

Treasury forecasts revenue growth to accelerate to 6.4 per cent for the fiscal year.

A tax revenue shortfall of R52.5 billion in 2019/20, R84 billion in 2020/21 and R114.7 billion in 2021/22 is expected. Treasury expects to collect R1.37 trillion in the current year.

The main budget deficit is estimated to widen to 6.2 per cent of GDP in 2019/20 compared with the 2019 Budget estimate of 4.7 per cent as a result of lower nominal GDP, tax revenue shortfalls and financial support for Eskom.

The debt on loans is expected to increase from R3.2 trillion or 60.8 per cent of GDP in 2019/20 to R4.5 trillion or 71.3 per cent of GDP in 2022/23.

The gross borrowing requirement made up of the budget deficit and maturing debt is expected to increase from 7.6 per cent of GDP in 2019/20 to 8.2 per cent of GDP in 2022/23.

As regards the main risks to the fiscal outlook, low economic growth, failure to achieve spending reductions and contingent liabilities are the standout items.

SPENDING PRIORITIES

Consolidated government spending is expected to total R6.3 trillion over the medium term expenditure framework period, growing from R1.8 trillion in 2019/20 to R2.2 trillion in 2022/23 at an average annual growth rate of 6.3 per cent.

Increases in main budget non-interest spending amount to R45 billion in 2020/21 and R22 billion in 2021/22 primarily due to additional support for Eskom.

Downward revisions amount to R21 billion in 2020/21 and R28.5 billion in 2021/22.

Learning and culture, social development and health receive the largest allocations totaling R3 trillion over the next three years.

Spending on debt-service costs is expected to outpace spending in areas such as health and community development by 2022/23.

Taking Eskom support out of the equation, national and provincial spending on goods, services and infrastructure is reduced by 2 per cent per year over the next two years.

Total main budget non-interest expenditure for 2019/20 increases by a net amount of R23.1 billion as compared to the 2019 Budget.

In-year additions to spending amount to R44.5 billion, partially offset by downward adjustments of R21.4 billion.

Additions to spending include R26 billion in the Special Appropriation Bill for Eskom; R5.5 billion for South African Airways; R3.2 billion for the South African Broadcasting Corporation; R1.8 billion for Denel; R429.8 million approved for student housing and R300 million for South African Express Airways.

Spending priorities per function group include:


• Bursary programme for poor and working-class students dominates spending within leaning and culture
• Health – funds reprioritized to establish NHI Office
• Social development – increased allocations to early childhood development to broaden access and raise per-child subsidy
• Economic development – funding to be reprioritized over the medium term, including from the comprehensive agricultural support programme grant, to increase compliance with biosecurity, animal and plant health, and phyto-sanitary and sanitary standards to improve trade in agricultural exports; funds to be allocated to improve post-settlement support (land restitution) in collaboration with agricultural commodity organisations and funds reprioritised to develop local economies through industrial parks.
• Peace and security – funds reallocated to improve prosecution capacity, fight corruption and combat cybercrime
• General public services – additional funding proposed to support audits for financially distressed municipalities and entities.

48.1 per cent of available non-interest expenditure will be allocated to national departments, 43 per cent to provinces and 8.9 per cent to local governments over the medium term.

The provincial equitable share will see a 2 per cent reduction per year in non-compensation spending.

As regards provincial allocations, grant funding for oncology and mental health will be introduced, direct grant to provinces to contract health professionals in NHI pilot districts and funds shifted to support initiatives addressing gender-based violence.

Treasury also announced that dedicated grant funding for large urban municipalities will be introduced in 2020/21 to address underinvestment in infrastructure.

Eligible municipalities will receive co-financing on a declining basis over three years.

Work with municipalities is also underway to increase their revenue-raising potential. The Draft Municipal Fiscal Powers and Functions Amendment Bill, to be tabled shortly, will standardise the regulation of development charges to help recover costs of connecting new developments to infrastructure for water, roads, electricity and other services.

ON THE HORIZON

National treasury announced that it has begun a review of public-private partnership regulation on infrastructure investment designed to merge approval processes and reduce implementation timeframes. The project is already under way and the findings will be published by September 2020.

The Public Procurement Bill, aimed at simplifying procurement processes and governance, will be gazetted for public comment once cabinet approval has been obtained.

Treasury plans to release a discussion document that reviews and proposes options to improve tax administration oversight in the 2020 Budget.

A bill intended to implement the findings of the Nugent Commission of Inquiry into the South African Revenue Service will be tabled early next year.