South Africa

SA budget: Five points to watch

By Greg Nicolson 25 February 2015

While this year's State of the Nation Address was about the sideshows and President Zuma's speech received little attention, today's budget speech will have a direct and immediate impact on the country. Finance Minister Nhlanhla Nene has to balance competing interests in daunting economic times. By GREG NICOLSON.

Taxes

They’re likely to rise. During his medium-term budget policy statement last year, Nene warned that an additional R22 billion needs to be found and the Treasury has said an extra R44 billion must be raised over three years. The state has committed to cutting the budget deficit, with the levels of gross government debt already high and the possibility of further credit downgrades on the cards if the deficit is not reduced. Downgrades of South Africa’s credit would further increase the costs of borrowing.

Nene has prepared the public and investors for the possibility of raising the necessary revenue through tax increases. No one likes more taxes and they will likely have a negative impact on the economy, but they will also send a better signal than allowing spending and debt to spiral unchecked. With the price of oil having dropped, there will most likely be an increase in the fuel levy. Also look out for an increase in sin taxes on alcohol and tobacco. It’s possible the wealthy will be targeted with increases in capital gains tax, estate duties and even the potential of raising the personal income tax for those who earn over R1 million a year to 45 percent. Nene could raise revenue through a slight increase in VAT but this seems unlikely as it would be politically unpopular with the middle and lower classes being negatively affected.

In its alternative budget speech on Tuesday, the DA said “a tax increase is both an unnecessary and unjustifiable burden on everyday South Africans”. Cosatu, meanwhile, has called for a host of new taxes, including a new category for the super-rich, a tax on luxury items and on exports of strategic minerals.

Trimming the fat

Both Nene and his predecessor Pravin Gordhan have made gestures towards reducing unnecessary and excessive government spending and the minister should announce measures to curb excess. It’s both politically wise and will help in raising the necessary revenue.

The DA’s alternative budget had some interesting ideas. The party said cutting corruption and maladministration could save R10 billion. They want the National Youth Development Agency and SETAs scrapped, claiming savings of R11 billion and reducing the size of Cabinet by getting rid of deputy ministers, said to save R335 million. While everyone says corruption, wasteful expenditure and maladministration should be curtailed, and Nene is likely to speak on the matters, particularly given R30 billion was reportedly spent on consultants last year, he won’t take up the DA’s more drastic suggestions. The key thing is whether he will announce significant savings on these issues or make symbolic gestures.

Public sector wage bill

It’s an issue every year, simply because it costs the state a fortune. Government remains the largest employer in the country and the cost of wages, about a third of the total budget, is seen as a key reason for a rising deficit in the past. However, with expenditure targets set, issues like load shedding, which is cutting economic growth and tax revenue, and costs such as Eskom’s need to buy diesel and keep the lights on, means high rises in public sector employees’ remuneration takes money away from other areas of expenditure.

The current round of negotiations between the state and unions continues. The offer of inflation-linked pay rises has been declined and the public sector unions have demanded a one-year deal with a 15 percent increase. That will drop, but the final number, likely to be above inflation if the state wants to avoid a lengthy battle, and the linked housing scheme that’s in the works, could have a significant impact on the economy.

Pan-African Capital Holdings CEO Iraj Abedian told Business Day on Tuesday that if the state failed to keep increases in the wage bill and social grants below inflation it would lead to sovereign credit downgrades. The DA said it could cut the public sector wage bill by R4.3 billion through avoiding raises higher than inflation, cutting spending from certain departments and linking salaries to performance. Nene’s headache would be eased if he could reduce the cost, but limiting the bill will likely prove difficult as in the past.

State business

What’s a discussion on South Africa’s financial position without mentioning the state-owned enterprises (SOEs) and assets? Last year, Nene said state assets would be sold to help cover the injection of cash Eskom needs to keep functioning. While South African Airways and Telkom have been mentioned as possibilities, it’s most likely that the state’s 13.9 percent share of Vodacom, worth a reported R28 billion, could be up for grabs.

Eskom will be a key word during the budget speech with significant support needed to fill the huge gap in finance to keep the utility running. “The current energy crisis which [Zuma’s] plan prioritises cannot be an excuse for the privatisation of state owned assets,” said Cosatu Tuesday. “We expect the minister to provide more resources to Eskom to enable it to execute its developmental mandate appropriately. The effectiveness of Eskom cannot be measured by the extent to which its balance sheet becomes more profitable but rather by the extent to which it can provide energy security to the country.”

The DA wants Eskom’s dominance on power supply broken up and divided into separate generation and transmission units allowing independent power producers into the market to raise competition. That seems unlikely, but Nene will still need to offer a decent plan.

A positive spin

Nene’s challenges come in part from problems with high spending, consistently low growth figures and a subdued global economy, but it’s essential that in weathering the storm he also offers some hope. Since the targeted growth of five percent a year was announced, the economy has been in decline and unemployment persists in the long-term.

Organisations like Cosatu and the United Front, which is marching to Parliament today, are calling on the minister to move away from what they see as a trend of austerity budgets and embrace a pro-poor plan introducing new measures to boost the economy and combat poverty, unemployment and inequality. There’s also an election next year, with the ANC facing strong opposition from the DA and EFF.

What might be Nene’s greatest struggle is not just figuring out how to weather the storm, but to convince the public that the state will be able to boost employment and effectively invest in infrastructure, education and health while continuing to fund social grants. He not only has to ensure credit agencies and investors see South Africa as financially responsible and stable, but also get the public to buy into a vision for the future. That’s not an easy task when the NDP, Freedom Charter and radical economic transformation are all vying for prominence while the credit agencies are at the door. DM

Photo: South African Finance Minister Nhlanhla Nene takes part in a discussion on “Challengers of Job-Rich and Inclusive Growth: Growth and Reform Challenges” during the World Bank/IMF Annual Meeting in Washington October 8, 2014. REUTERS/Joshua Roberts

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