In the most polite terms it can be said that the medium-term budget presented in October gave debt consolidation and fiscal prudence the middle finger, with government debt and debt service costs blowing out to unsustainable levels.
In contrast the 2018 budget, presented by the same finance minister, Malusi Gigaba, was a come-hither budget, designed to restore confidence and reassure the ratings agencies, international investors and the South African population that the country’s public finances were back on a path to fiscal consolidation.
It was a colossal task, but Gigaba and his team at National Treasury caught a lucky break. Renewed optimism post the election of Cyril Ramaphosa as ANC president in December has spurred business and consumer confidence. The economy has bottomed out and has grown faster than projected at the time of the October Medium-Term Budget Policy Statement (MTBPS).
GDP grew at 1% in 2017 (up from 0.7% projected), with estimates of real GDP growth of 1.5% in 2018, 1.8% in 2019 and 2.1% in 2020. These growth figures are lower than projected in 2017, but they may just be enough to help stabilise SA’s budget – after all deficits are best resolved by faster growth.
New tax measures raise an additional R36 billion in 2018/19, mainly through a higher VAT rate and below-inflation adjustments to personal income tax brackets.
The expenditure ceiling has been revised down marginally over the next three years compared to the MTBPS. Underlying this are reductions and reallocations including spending cuts amounting to R85 billion, an allocation of R57 billion to fee-free higher education, and additions to the contingency reserve of R10 billion.
As a result National Treasury has managed to deliver a marginally better than projected revenue shortfall (R48.2 billion vs the R50.8 billion shortfall projected in October). Following from this, the budget deficit (the difference between South Africa’s revenue and expenditure) will narrow from 4.3% of GDP in 2017/18 to 3.5% in 2020/21.
This is a marginal improvement on the 3.9% that was projected in October for each of the next three years.
Of course with ongoing budget deficits there is a need to finance the shortfall and the key question is where net debt levels are going? The MTBPS painted a bleak future for our debt situation with net debt set to peak at 55.6% of GDP in 2020/21 with gross debt peaking at 60% of GDP in 2022.
The good news (under pretty dire circumstances) is that net debt is expected to stabilise at 53.2% of GDP in 2023/24, and is set to reduce from there. In the meantime debt service costs continue to rise, albeit more slowly.
The MTBPS set aside a hefty R163 billion for interest payments in 2017/18, rising to R223 billion in 2020/21. While debt service costs remain the same for 2017/18, the trajectory eases to R180.1 billion for 2018/19 and R213.9 billion in 2020/21.
Structural reforms to boost growth have been promised; steps have been taken to revise governance at state-owned enterprises and policy dilly dallying is being addressed. However the question remains: will this be enough to stave off a Moody’s downgrade? Ratings agencies will be looking for a budget deficit that is closer to 3% over the next three years and gross debt that returns to around 50%. Neither of these metrics have been met.
Gigaba believes it is: “We believe the difficult decisions we have taken will have the least [detrimental] effect on growth. We are confident we can maintain discipline on the part of the government and we call for resilience on the part of the public as we make these changes.”
Read more from the 2018 budget speech