Finance Minister Tito Mboweni stuck doggedly to the expenditure-reduction framework first outlined in October, announcing cuts of R156-billion relative to the 2019 Budget baseline for the coming three years, a sizeable portion of which would be derived from cuts to the public-sector wage bill.

The proposed expenditure baseline cuts are equivalent to about 1% of gross domestic product (GDP) a year and include collective reductions of R261-billion to the 2022/23 fiscal year, including a R160.2-billion reduction in the wage bill of national and provincial departments and national public entities.

A baseline reduction of R66-billion was outlined for 2020/21, including a wage-bill reduction of R37.8-billion. In 2021/22 and 2022/23, the baseline reductions were forecast to rise to R88-billion and R106.8-billion respectively, with reductions in the wage bill accounting for R54.9-billion and R67.4-billion respectively.

The cuts would be partially offset by reallocations and additions of R111.1-billion, of which R60.1-billion is set aside for Eskom and South African Airways (SAA).

Mboweni dismissed the suggestion that the expenditure reductions represented “austerity” measures, arguing instead that they reflected a need to “clean house”.

Had an austerity Budget been implemented, it would have translated to the closure of schools and hospitals, or the grounding of air force jets. “We are still far away from that,” Mboweni quipped.

The proposed wage-bill reductions will, nevertheless, likely to be strongly opposed by South Africa’s public-sector unions, many of which are affiliated to the Congress of South African Trade Unions, which is a formal alliance partner of the governing African National Congress.

Ahead of the Budget, public-service unions rejected the package presented by government at the Public Service Coordinating Bargaining Council to review the above-inflation increases secured during negotiations in 2018.

Mboweni expressed confidence, however, that a resolution could be found, revealing that informal talks on a package of measures to reduce the wage bill had been under way for some time.

The National Treasury’s Budget Review notes that civil servants’ salaries have grown by about 40% in real terms over the past 12 years, without equivalent increases in productivity.

“Growth in the wage bill has begun crowding out spending on capital projects for future growth and items that are critical for service delivery,” the document adds.

“This target can be achieved through a combination of modifications to cost-of-living adjustments, pay progression and other benefits,” the National Treasury argues, adding that the proposed wage reductions could result in a 1% fall in the consolidated compensation spending over the medium term.

Mboweni also stressed that there was more than one way to reduce the wage bill. “Organised labour understands where we are. They have made constructive proposals on a range of issues,” he told lawmakers in his address.

He also said he had the full support of his Cabinet colleagues for the intervention, describing the Cabinet meeting held ahead of the Budget as one of the “nicest” he had ever attended.

NO TAX HIKES

The Minister surprised many commentators by refraining from announcing any new tax hikes, despite a R63.3-billion downward revision to government’s tax-collection estimates for 2019/20 relative to the 2019 Budget projection. Government expects to collect tax revenues of R1.35-trillion in 2019/20 and R1.43-trillion in 2020/21.

“In these difficult economic times, it would have been foolhardy to raise taxes,” Mboweni said, highlighting the tax relief granted through better-than-inflation adjustments made to personal income tax brackets.

He said he hoped, in time, to also make some “accommodation” on corporate taxes, but did indicate that he had fought, but lost, an internal battle to introduce an additional tourism tax.

The traditional increases were announced, however, to fuel and environmental levies, including a higher plastic-bag levy, together with hiked duties on alcohol and tobacco products.

Mboweni’s tax restraint was sustained notwithstanding a serious deterioration in the outlook for South Africa’s growth and the fiscal balance.

The National Treasury estimates that the South African economy grew by only 0.3% in 2019 and expects the economy to expand by only 0.9% in 2020, 1.3% in 2021 and 1.6% in 2022.

In the October Medium-Term Budget Policy Statement, the National Treasury lowered its growth forecast for 2019 to 0.5% from the 1.5% guidance provided in February, which was already its lowest growth forecast since the global financial crisis of 2008/09.

DEBT WON’T STABILISE

The consolidated deficit would increase to 6.8% of GDP in the upcoming fiscal year, or to R370-billion, from a revised estimate of 6.3% in 2019/20. The deficit was expected to remain elevated at 5.7% in the 2022/23 outer year of the fiscal framework.

Mboweni acknowledged, though, that debt would not stabilise over the coming three years, with the widening gap between revenue and expenditure having to be financed.

Gross national debt is estimated to increase from 65.6% of GDP in 2020/21 to 71.6% of GDP in 2022/23. This represents a marked deterioration from the 2019 Budget, when the debt-to-GDP ratio was expected to peak at below 60%.

Over the past year, government’s gross borrowing requirement increased by 21.4% to R407.3-billion and borrowing is expected to reach R497.5-billion in 2022/23.

Debt-service costs of R229.3-billion, meanwhile, would increase to be almost in line with health spending, which remained the third-largest expenditure item at R229.7-billion. The largest two expenditure items were social development (R309.5-billion) and basic education (R265.9-billion).

Debt-service costs, the National Treasury highlighted, had been the fastest-growing area of spending, rising from 9.8% of main Budget revenue in 2010/11 to 15.2% in 2019/20.

Debt-service costs would be higher than the 2019 Budget estimates by R2.8-billion in 2019/20, R5.2-billion in 2020/21 and R11.1-billion in 2021/22. This is mainly driven by the higher budget deficit alongside fluctuations in interest, inflation and exchange rates.

REFORMS & SOC SUPPORT

Mboweni said that achieving faster economic growth during the upcoming period of fiscal consolidation would require far-reaching structural reforms, the most urgent of which would be to clear the regulatory path to enable the private sector to generate electricity.

Reforms were also required, the Minister said, to lower the costs of ports and rail logistics, as well as telecommunications.

Nevertheless, government would continue to support struggling power utility Eskom, as well as its embattled national carrier SAA, which is currently in business rescue.

Government has set aside R16.4-billion for SAA over the medium term to repay the airline’s guaranteed debt and to cover debt-service costs. Last year, government announced support of R230-billion over a ten-year period to Eskom, with transfers of R49-billion made in 2019/20.

Over the past 12 years, government has allocated R162-billion to financially distressed State-owned companies (SOCs), with Eskom accounting for 82% of that amount.

No new bail-outs were announced for Eskom, which is the country’s largest SOC and which has been identified as the largest risk to the economy and the fiscus.

The National Treasury expects electricity shortages to continue to constrain growth over the next three years, but says that energy expenditure is expected to total R150-billion, accounting for one-fifth of total infrastructure spending over the period.

On whether the Budget would be sufficient to stave off a downgrade by Moody’s, Mboweni was philosophical.

He said that he was certain that Moody’s would pay special attention to the “fiscal stance” contained in the Budget, which committed government to reducing the deficit in the outer years.