Nene patches SA’s fiscal cracks

Elephant in the room remains the state’s HR bill.

Surprisingly, the 2015 national budget did not have many surprises.

It was the most anticipated budget address in many years due to concerns that the cracks in South Africa’s fiscal position could widen as a result of ambitious spending plans and a decline in tax revenues.

But new Finance Minister Nhlanhla Nene addressed these concerns aptly in his maiden budget address. He presented a sound and relatively conservative budget which rating agencies would find positive reading.

The most notable element of the budget is that the expected deficit for the new financial year is (only) 3.9% of GDP. This is similar to the actual deficit of 3.9% in the current financial year, which ironically was lower than the 4% Nene’s predecessor Pravin Gordhan promised during his final budget address last year.

This is a good number, especially as many commentators expected a significant fiscal weakening with the deficit approaching 5%.

It is also apt that Nene jumped to appoint a new advisory committee under retired Judge Frank Kroon to investigate the chaos at the South African Revenue Service (Sars).

Sars’ good reputation has been severely tarnished during recent months following revelations of gross misconduct and dishonest behaviour.

Hopefully this committee can get to the bottom of the shenanigans and rebuild the integrity of the service. If the problems flow through to an operational level, this could become a bigger problem for the government than Eskom and the SAA put together. 

Tax

But back to the budget.  The good deficit forecast did not happen by itself, and flows mostly from higher taxes and a slight arrest of expenditure growth. Although higher taxes were expected, it will have a negative impact on the economy. It as it will reduce consumer spending, a key to economic activity.

The biggest tax hikes were for personal income tax and the fuel levy, but they were widely expected. My immediate impression is that it is not excessive and that most affected taxpayers would reluctantly accept this. 

However, the most surprising element of the budget is the massive hike in the fuel levy, a cool 80.5c per liter, which will suck nearly R18 billion from consumers’ wallets. The bulk of this increase is the proposed 50c a liter increase of the Road Accident Fund (RAF) levy. This is a massive increase. The current levy is R1.04, which means that Nene has hiked it by nearly 50%.

Nene did state that the current RAF compensation system is not sustainable, but the magnitude of the levy adjustment would suggest that the problems within the RAF are bigger than previously anticipated. It seems to be in a R100 billion hole, and Nene is hitting motorists with a massive stick to address this problem.

It is also a bit ironic that Nene would approve such a significant increase in the RAF levy, and not even address the critical question of the use of the levy to finance, or at least partly finance, the e-toll highways in Gauteng.  This could just add some more oil to the fire…

I also found it disappointing that Nene did not thank taxpayers in his address. His predecessors, especially Trevor Manuel, always compellingly thanked taxpayers for their contributions. Gordhan did too. It may be a trivial thing to do, but Nene should have done. Most taxpayers work very hard for their money, and it does leave a bad taste in the mouth when you see government institutions spending it without the necessary care. The RAF example above is a good case in point.

Austerity

Nene also alluded to several austerity measures through which government will decrease expenditure on certain “non-critical” expenditure items. This includes the slashing of budgets for catering, entertainment and travel costs. These expenses are mostly populous.

Unfortunately, Nene did not touch the elephant in the room, which is the massive public wage bill. The table below shows that salaries represent nearly 36% of the total government expense bill for the current financial (2014/15) year. This percentage is set to slowly decline to 34,5% in 2017/18.

The increase in this personnel costs over the next three years amount to 8% next year, and then 6% in the two following years. This may be very optimistic (read wishful thinking), as trade unions are gearing up for fierce negotiations for double digit increases.

 

2014/15

2015/16

2016/17

2017/18

Compensation of employees

R 445bn

 R480bn  

 R510bn  

 R540bn

Total expenditure

 R1 243bn

 R1 351bn

 R1 449bn

 R1 562bn

% of total budget

35,8%

35,5%

35,2%

34,5%

 

Nene only briefly referred to the wage bill, but he merely referred that government is busy with a “consolidation” of personnel numbers, but did not elaborate at all. This could become a political hot potato, especially prior to an election and with the ANC who cannot afford to alienate its trade union partners. 

Implementation is key

South Africa has over the years seen many good budgets. In fact, I cannot recall a budget address which did not impress me and left me with confidence in the treasury to manage South Africa’s finances.

There is however a massive gap between a good and well-considered budget and the perceived financial management chaos within many government departments and agencies. Apart from allegations of corruption, it seems as if tax money is being wasted and used very inefficiently.

This angers virtually every single taxpayer, especially when taxes are hiked.

The redeployment of Gordhan to local government may have been a masterstroke to address this, but it is not evident if he has managed to improve the situation.

Overall, Nene announced a good budget with sufficient fiscal discipline to at least postpone a credit ratings downgrade. He now needs to ensure that it is implemented with the same care.

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