South Africa

BUDGET2019

Hard reality check for Eskom, public wage bill and no love for taxpayers

Finance Minister Tito Mboweni speaks to the media shortly before delivering his maiden budget speech in Parliament, Cape Town, 20 February 2019. Photo: Leila Dougan

In a hard-hitting Budget that bluntly put a daily R1-billion price tag on borrowing costs, Finance Minister Tito Mboweni pulled off a political juggling act “in the interest of our people and our country, and not in the narrow objectives of any political party”. Mboweni’s maiden R1.83-trillion Budget, delivered with a little help from three Bible verses and Charles Dickens, was a hard reality check to Eskom, which got left with all its debts to pay itself. The role of the public sector trade unions in reducing the public wage bill emerged as key, as well as taxpayers - who get no notable relief.

See full budget speech here:

Eskom did not get what it wanted, and what was widely expected – a R100-billion debt swop by which government would take over a share of the power utility’s R419-billion debt book on to its own. Instead, Wednesday’s Budget allocated the power utility a R23-billion a year injection for the next three years, or R69-billion in total, to support the restructuring into three units that President Cyril Ramaphosa announced in his State of the Nation Address (SONA) earlier in February.

Those billions come with conditions, including the appointment of a chief reconfiguration officer, and the possibility of a strategic private equity partner once there is an unbundled transmissions division. “The new company will invite the participation of strategic equity partners that will provide capital for the business and strengthen oversight,” says the Budget Review document

Briefing journalists ahead of delivering the Budget in the House. Finance Minister Tito Mboweni argued that there would be no privatisation of Eskom, but tough conversations needed to be had around institutional culture. “There is no free lunch here. This is taxpayers’ money. We must look after it.”

Presenting the Budget to MPs later, Mboweni in his prepared speech said: “Pouring money directly into Eskom in its current form is like pouring water into a sieve. I want to make it clear: the national government is not taking on Eskom’s debt. Eskom took on the debt. It must ultimately repay it.”

The R23-billion a year over the next three years was “to financially support Eskom during its reconfiguration”. Finish and klaar.

A similar tough message also was delivered to public sector trade unions over the public wage bill. In 2018 civil servants scored a significantly above inflation wage deal and trade unions vocally opposed government plans to allow early retirement without penalties as a move to try to reduce the public wage bill.

Mboweni said the public wage bill was “unsustainable”, another politically unpalatable message to the governing ANC’s alliance partner Cosatu. But government must save R27-billion over the next three years from the public wage bill – it currently stands at 35% of Budget – through early, penalty-less retirement. According to the Budget Review, departments must realise a 50% savings by scaling up this early retirement by older employees. The aim is to shed 30,000 employees in this way.

In return, in a gesture of goodwill, this year neither parliamentarians nor members of the executive would get a pay increase. That wage freeze for political office holders would save some R132.8-million.

Cutting the public wage bill is key to government expenditure reduction, overall R50.3-billion over the next three years, including aside from the public wage bill also R12,8-billion from spending cuts in specific programmes like the special defence account that loses R5-billion by 2022.

For taxpayers, there is also no particularly good news. Although rebates will be adjusted by 1.1% to provide some inflation-related relief, and the tax-free threshold will rise to R79,000 from R78,150, tax brackets will not be adjusted.

In no small part that’s the outcome of the tax collection shortfall that increased to R42.8-billion, up from the initial R27.4-billion anticipated shortfall in October’s Medium-Term Budget Policy Statement (MTBPS). The current remedial steps at the South African Revenue Service (SARS) to repair capacity decimated in recent years are under way, including fining a permanent commissioner and reinstituting compliance enforcement.

Not providing relief for taxpayers right now is key to help raise the R15-billion government needs to raise to make good on shortfalls. The remainder would come from sin tax increases and, more significantly, from the fuel levy that goes up 29 cents per litre of petrol, and 30 cents per litre of diesel.

As part of the balancing act, Mboweni has lifted the expenditure ceiling by R14-billion in the 2019/20 financial year to allow government some space to manoeuvre in a low growth economy. In 2018 economic growth is put at 0.7%, although this is expected to rise only to 1.5% in 2019 – with a budget deficit of 4.2% of gross domestic product (GDP). Inflation is set to remain below to upper range of 6%, but is expected to increase to 5.1% in 2019, up from 4.7% in 2018.

It’s a tough numbers game and the finance minister did not mince his words in the House. South Africa was spending R243-billion more than what the country generated in revenue in the 2019/20 financial year.

Put another way, we are borrowing about R1.2-billion a day, assuming that we don’t borrow money on the weekend. This coming year, interest expenditure will be R209.4-billion. This is R1-billion a day,” said Mboweni.

But the finance minister remained determinedly upbeat, saying it was possible to turn things around, even if it would not be easy and there were no quick fixes.

The Budget, despite its hard reality check, remains distributive. Importantly, social grants increase mostly by just a little above inflation at 5%. Pensions increase to R1,780 a month and those for people older than 75 to R1,800, the same level as war veterans. Disability and care dependency grants rise to R1,780 and foster care grants to R1,000 a month. The child care grant rises to R420 per month, up from R405 a month, from April and R430 from October.

R500-million has been set aside to ensure all social grant recipients get one free ATM withdrawal every month.

Boosting economic growth and job creation remain mainstays, although there emerged a key shift in approach, as the private sector is clearly identified as “the key engine for job creation” in a turn-around from previous emphasis on government works programmes.

While Mboweni called for data costs to fall, he also announced industrial business incentives of R19.8-billion, of which R600-million are for the clothing and textile competitiveness programme to support 35,500 existing jobs – and create 25,000 new jobs in the next three years.

With a host of incentives like the youth employment incentive that is meant to support 1.1-million youngsters, this will be the test of Ramaphosa’s Thuma Mina approach, and calls for a social compact between government, labour and business. The 2019 Budget Review clearly shows that while net employment rose by 225,000 in 2018 it was largely through the informal non-agriculture sector. “Private-sector employment growth has been slowing since 2011. Job creation remains stagnant,” said the review. “Private sector employment growth was flat over the first three quarters of 2018…”

The overwhelming majority of the Budget, or R1.1-trillion, is allocated to social services, of which basic education is the largest beneficiary at R250.4-billion. Getting education right, according to the Budget Review, was “at the heart of improving the country’s economic potential”. School infrastructure is allocated R34.3-billion over the next three years for schools and an additional R2.8-billion to eradicate pit latrines at 2,400 schools.

Community development – effectively infrastructure and basic services –  grows to R243.7-billion in 2021/22 from R186.4-billion in 2018/19. And it is this infrastructure, including building cities to accommodated rapid urbanisation, that remains central. Mboweni announced an acceleration of R526-billion worth of projects by bringing on board private sector and development finance institutions. Over the next decade, government would commit to R100-billion infrastructure.

Interestingly, while much was made of the National Health Insurance (NHI) in SONA, there is no real new money in the Budget, which shifts overall health-related R4.3-billion allocations for, for example, the recruitment of medical workers in preparation for the NHI. And while land and land expropriation without compensation may have dominated in the political public discourse, there are few rands and cents in the Budget: an additional R887-million have been allocated over the next three years to the black producer commercialisation programme to support emerging black farmers.

The Budget transfers 47.9% of funds to provincial government, and 9.1% to local government, where the Budget Review also proposes interventions to shore up increasing council debts. In his speech, Mboweni called for a strong culture of payment to re-emerge at local government level: “Thuma mina. Pay your municipal bills on time.”

The Budget and its related documentation reflect the rand and cent allocations to ensure policy interventions can be successful. For example, R600-million will go to a township and rural enterprise fund to support entrepreneurs. Or the R793-million allocated to help financially distressed councils to turn around. And then there’s the R165-million for the Presidential Infrastructure Co-ordinating Commission to ensure better planning capacity. Or the R272.9-million for the Zondo State Capture commission of inquiry.

In the House on Wednesday, Mboweni decidedly had his eyes on the future, the year 2019 was a tough reality check and not much to celebrate. However, the finance minister was adamant that it was the right Budget for the time in an effort to set South Africa on a route to growth and renewal.

It will not be easy. There are no quick fixes. But our nation is ready for renewal. We are ready to plant the seeds of our future,” said Mboweni. There was much talk of being the master of one’s own destiny. DM

 

 

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