MTBPS 2018: The good, the bad and the ugly

Finance Minister Tito Mboweni painted a sobering picture of the nation’s finances in his maiden Medium Term Budget Policy Statement

Finance Minister Tito Mboweni delivers the 2018 Medium-Term Budget Policy Statement in Parliament on 24 October 2018. Picture: GCIS.

CAPE TOWN - “South Africa finds itself at a crossroads” – that’s the first line of Treasury’s Medium-Term Budget Policy Statement (MTBPS) document. It goes on to describe a low growth outlook, with less cash coming in through revenue collection, a widening deficit, increasing wage costs, and a state-owned enterprises sector mired in debt.

Low growth remains a major challenge – the MTBPS revises GDP growth down from February projections – with the economy expected to grow at just 0.7% this year. Current projections put growth at 1.7% in 2019; 2.1% in 2020 and 2.3% in 2021. By comparison, the International Monetary Fund expects the global economy to grow at 3.7% in 2018 and 2019.

Government plans to take steps to bolster economic activity and drive investment and job creation, and focus its spending on areas that can help grow the economy.

In his speech, Mboweni pointed to a need for clear and consistent policies, reminding MPs that investors take a long view, and a rebuilding of confidence could help unlock much-needed investment.

“We must stop talking in contradictory terms,” he said.

Among the initiatives detailed in the MTBPS are a plan to ease visa requirements to boost tourism, and help those with scarce skills to work in South Africa.

Government will review the current Electricity Pricing Policy, as part of a broader process of restructuring Eskom.

Partnership forms a large part of the strategy to drive growth, and increase knowledge, from the recent jobs summit, to the upcoming investment summit, to a new partnership with government departments and international agencies called SA-TIED. The point of that partnership is to produce high-quality academic research, that will eventually inform better policy formulation.

TAX REVENUE

Lower growth means lower tax revenues coming into the fiscus. Revenue shortfalls have widened over the past four years, and for the first time since 2008, tax revenue growth did not exceed GDP growth. SARS has managed to grow revenue collection by 10.7% in the first 6 months of the 2018/2019 financial year, but it won’t be enough. Treasury has revised its estimates of revenue collection from February’s National Budget, and is now expecting R27.4billion less to flow into the fiscus from taxes.

NO NEW TAXES

Despite the predicted shortfall, there is some good news in the MTBPS, including an indication that no new tax increases are planned for the moment.

Government is also proposing the addition of three new items to the basket of VAT zero-rated goods, namely white bread flour, cake flour and sanitary towels.

As from 1 April 2019, VAT will no longer be charged on these items.

SPENDING

Government has committed to pouring R855.2 billion into public infrastructure over the next 3 years. It will also be spending more on public transport, education and health.

The MTBPS details changes in grant structures amounting to R14.7 billion, that will free up money to upgrade informal settlements over the next three years.

Education gets R3.4 billion over the medium term, including R800 million that will be added to the school infrastructure backlogs grant to complete sanitation projects. The money is expected to be used to eradicate pit latrines at the nation’s schools.

The National Health Insurance plan is getting another R166 million boost to allow it to procure medical equipment, and complete the design of a new academic hospital in Limpopo. Government will also reprioritise R546 million within the NHI to allow for the hiring of more medical professionals and to buy beds and linen for health facilities.

Public Transport infrastructure spending is set to rise to R101.1 billion, to build integrated transport networks in 13 cities - this includes Phase 2 of the MyCiti bus rapid transport system in Cape Town and the Rea Vaya in Johannesburg.

SOEs

Other big-ticket spending items include cash injections for ailing SOEs.

SAA and SAA Express will both be getting bailouts, and so will the South African Post Office.

SAA will get R5 billion to help pay debt to the tune of R14.2 billion that comes due in or before March 2019.

Treasury has also acknowledged that the national carrier is simply not making enough cash to service debt, which means it will likely have to refinance existing debt. SA Express also needs a cash injection to service debt, to the tune of R1.2billion.

The South African Post Office will also get an injection of R2.9 billion to address its debt.

Another big warning sign relates to the Road Accident Fund, where liabilities are expected to grow to R393 billion by 2021/2022. That could mean large fuel levy increases to fund that over the next 3 years.

Mboweni’s team has also sounded warnings around the finances of Sanral. It currently has government guarantees of R38.9 billion, which might have to be called, because e-toll revenues are lower than expected.

Mboweni told a pre-speech media briefing that South Africans need to change their mindset, advocating for a “user-must-pay” mentality, that would see South Africans shell out the cash for services they use – including the highly unpopular e-tolls levied by Sanral.

The MTBPS documents are at pains to stress the need for higher standards of governance and more effective use of public money in the future.

Mboweni has also re-introduced the prospect of selling off or even shutting down poorly performing SOEs, saying the nation needs to be “open-minded” about the prospect.

In delivering his speech, Mboweni highlighted some of the gains made at SOEs – particularly SAA, saying all its regional and domestic routes have become profitable over the past year. He’s promising that the national carrier will reduce, and ultimately stop operating loss-making routes

“Despite these efforts, SAA is still loss-making and even more radical measures need to be undertaken. There should be no holy cows!” he told MPs.

PUBLIC SERVICE WAGES

One potential “holy cow” that’s throwing a spanner in the spending works is the Public Servants wage bill. It accounts for more than 35% of government’s total spending.

“The 2018 public-service wage agreement exceeds budgeted baselines by about R30.2 billion over the medium term,” he told MPs, “We have not allocated additional money for this.”

That means national and provincial departments will have to absorb the costs. Mboweni pointed out that the wage bill represents the biggest cost pressure on the budget, crowding out other key items such as the procurement of goods and services and capital investment in social spending.

READ: The full MTPBS

Speech by Primedia Broadcasting on Scribd