Medium-Term Budget: Nene’s House of pain and cutbacks

By Ranjeni Munusamy 23 October 2014

If South Africans are annoyed now with wanton spending in government to keep the top set in the lap of luxury, imagine what it will be like from February when higher taxes are announced? Finance Minister Nhlanhla Nene set out in his first Medium-Term Budget Policy Statement on Wednesday just how bleak the economic outlook is, and a range of measures to curb spending and raise revenue. The statement was largely aimed at pacifying ratings agencies to avoid another sovereign credit ratings downgrade. But if Nene is to succeed where his predecessor was frustrated in getting more bang for his buck, he needs the president and his Cabinet to fully buy into his reformation agenda. By RANJENI MUNUSAMY.

When Finance Minister Nhlanhla Nene delivers the 2015 Budget in February, expect him to do his best Oliver Twist impersonation for the taxpayer. A raft of changes to the tax dispensation are expected, stemming from the assessment of the tax system being conducted by the committee headed by Judge Dennis Davis. It now looks inevitable that the taxpayer will need to dig deeper, although the details of the changes will only be revealed in the Budget.

Nene said in the Medium Term Budget Policy Statement on Wednesday that R15 billion a year in additional revenue needed to be raised. “The revenue measures will be designed to limit as far as possible any negative impact on growth and job creation,” he said.

It will be a tough ask on the taxpayer in a difficult financial climate, especially when it seems that the Mardi Gras is still on in government in terms of wastage and spending. But Nene’s straight shooting speech declared that the party was over and added that a culture of “doing more with less [was] required”.

Members of the House, we have reached that turning point. Fiscal consolidation can no longer be postponed. By proposing measures to reduce the budget deficit, government will stabilise public debt and ensure the sustainability of our critical social programmes. The proposals being tabled today complement reforms under way to encourage lower consumption, higher savings and increased productive investment,” Nene said.

He began his maiden budget policy statement as Finance Minister by immediately spelling out the bad news in terms of economic growth. “When we tabled the 2014 Budget in February, we expected the economy to grow by 2.7% this year. The revised estimate is 1.4%. The Treasury projects that growth will reach 3% in 2017.”

Nene attributed the downward partly on the weak global environment, but said it also reflected “obstacles to our own development”. These were energy constraints, labour market disruptions, skills shortages, administrative shortcomings and difficulties in industrial transformation.

The budget framework we table today is focused on restoring balance to the nation’s finances, bolstering investment, and achieving better value for money in public expenditure,” he said.

In order for the National Development Plan (NDP) to be implemented, it requires economic growth of 5%. Nene was quite frank about this too. “We cannot achieve this vision if we remain on our present economic path. We have to navigate a definite change of course, taking all South Africans with us.”

In last year’s Medium Term Budget Policy Statement, former Finance Minister Pravin Gordhan announced cost containment measures to curb wastage and the high-flying lifestyles of members of Cabinet. These included measures to limit expenditure on conferences, travel, entertainment and catering. The cost containment instructions were issued in January, but it is unclear how much impact this has had.

While the measures were initially welcomed by the Cabinet, with some ministers taking demonstrable action to cut up their credit cards, there were later efforts to relax the stringent instructions. It was a problem Gordhan seemed to run into consistently, where the Treasury’s intentions for fiscal prudence did not have support where it mattered.

Nene is treading the same path, hoping for better results. He said there would be supplementary cost containment measures to contribute to projected savings of R1.3 billion over the next two years. “Across national departments, planned expenditure on travel and subsistence, conference venues and catering has been cut. Advertising and communications budgets have been reduced. Allocations for consultant services have been capped.”

He said lower government consumption also required prudent management of the public-sector wage bill, while maintaining the real value of public service salaries. And this is the issue where he needs real political support. It is where Gordhan had the carpet pulled from under him.

Public sector wage negotiations is a loaded political issue. The last round of negotiations took place ahead of the ANC’s elective conference in Mangaung, where President Jacob Zuma and others were dependent on the support of the public sector unions to maintain their dominance. After months of protracted negotiations, a deal was struck outside the bargaining chamber, giving above inflation increases to civil servants – R1.4 billion in national departments and R4 billion in provinces. Gordhan and Treasury were left having to juggle cents around to accommodate these higher than budgeted-for increases.

Nene wants to slice off spending on the bloated civil service but it is not clear how much political support he will have for this. As part of the measures to lower the expenditure ceiling by R25 billion over the next two years, he has proposed withdrawing funding for posts that have been vacant for some time and said new posts should be funded from existing allocations. With regard to the budget allocation to provinces, Nene said: “Special attention must be paid to containing personnel expenditure, which now accounts for 61% of total provincial spending.”

While the aim is to reduce the budget deficit from 4.1% this year to 2.5% over the next three years, Nene said the budget would not be balanced on the backs of the poor, and that the aim was to improve service delivery. A public procurement review will be released next month outlining reforms to be implemented over the next five years. “We will continue to fight waste and corruption, supported by our audit institutions and stringent monitoring and reporting requirements.”

There is also caution not to increase the deficit while bailing out Eskom. Government is planning to sell-off non-strategic assets – what these are remains to be seen – in order to provide R20 billion in funding to Eskom. The energy utility will also borrow R250 billion over the next five years. Nene said consideration would be given to a partial equity conversion of the R60 billion loan that has already been provided to Eskom. Despite these drastic measures to keep the utility afloat, electricity supply will remain tight until the first units of the new Medupi power station come on line and the capacity of existing plants improve.

Steps are also to be taken to address financial risks and improve governance at South African Airways, South African Express, the SA Post Office and the Land Bank. There is no indication of plans to sell off these onerous assets but government would be compiling a list of all the state-owned enterprises it was planning to sell, Nene said ahead of his speech.

Nene made no mention of the plans to invest in nuclear energy, an issue that was closely watched in light of reports that a procurement deal had been signed with the Russian nuclear company Rosatom. It was strange that Nene avoided the subject, given that Zuma announced in the State of the Nation address in June that there needed to be an injection of capital and human resources into the energy sector, particularly in the area of nuclear energy.

But this is also probably as a result of the political and financial heads in government talking cross-purposes. The Treasury has been trying to navigate the tightrope of what is realistically possible in terms of government spending and at the same time incorporate the political rhetoric of bold plans and interventions. It is clear that with the current rate of economic growth, implementation of the NDP will be hampered. ANC speak of “radical economic transformation” is still a pipe dream.

Nene’s statement set out to appease rating agencies to show that the economy would be managed with a firmer hand and the country would not default on the repayment of loans. But there is clearly still turbulence and policy vagueness that counter measures by Treasury to calm the waters.

Until there is a common understanding of South Africa’s economic policy direction, it will continue to be an emergency situation every time a major Budget presentation is delivered. And the day the word “austerity” will be incorporated into the parlance is perhaps the only time everyone will understand just how dire the situation is. DM

Photo: Then South African deputy finance minister Nhlanhla Musa Nene, speaks about ‘Taking Change Not Taking Charity: How Africa Can Lead Its Development’ during the 4th High Level Forum on Aid Effectiveness on BEXCO in Busan, South Korea, 29 November 2011. EPA/JEON HEON-KYUN


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