ACDP MP and spokesman on financial matters, Steve Swart, has expressed concern that new Finance Minister Tito Mboweni, has deviated from the fiscal consolidation path required to reign in the spiraling public debt levels and instil confidence in investors and ratings agencies.

“The new Finance Minister, Tito Mboweni, had very little fiscal room to move given the low economic growth we have experienced. Consequently, he has not been able to adhere to the strict fiscal consolidation path announced by his predecessors in order to reign in the spiraling public debt levels.

The budget deficit for this financial year is set to be 4.2% of GDP (slightly up from last February’s forecast of 3.6% of GDP), while the forecast for the 2019/20 financial year is 4.5% (significantly higher than the 3.6% forecast in February last year). With low economic growth of 1.5% of GDP, the fastest growing item on the budget is debt service costs, which are set to balloon over the medium term (R202bn for 2019/20).

We welcome the fact that there was no increase personal and corporate tax rates (there will, however, be the normal increases in ‘sin-taxes’ and the fuel levy), as well as the VAT rate. There have been the standard increases in ‘sin-taxes’ and the fuel levy as well as reduced allowances for bracket creep. We also welcome that increases in social grants, but believe they should have been higher, given the pressure on households.

We also expected additional funding to be given to the National Prosecuting Authority to fund the new investigating directorate. This directorate will play a crucial role in bringing those implicated in state capture and corruption to book, and in recovering the stolen state funds. Effective law enforcement is necessary to turn the tide on crime and corruption, and will save the fiscus billions at a time when state finances are severely constrained.

A credible plan must be provided to boost economic growth to address unemployment and poverty, as well as contributing much-needed revenue to the state coffers. A shift needs to take place from consumption spending (salaries, etc) to infrastructure spending. This will require a reprioritization of Government expenditure within the fiscal framework.

We also welcome the much-needed improvements at SARS (as set out in the findings of the Nugent Commission), including the re-establishment of the Big Business Unit and improving IT capabilities, as well as clamping down on trade in illicit cigarettes and tobacco. Increased revenue will assist in balancing the books, particularly since tax revenue has been revised downward by R15.4bn compared to the October estimate.

We await the responses of investors and credit rating agencies, given that the Minister has deviated from the fiscal consolidation path adopted by his predecessors. They will be the judge of whether the degree of deviation is acceptable given the pressures on state finances, and the need to bail-out state-owned companies (SOCs). As it stands the main budget revenue for 2019/20 will be R1583.8bn, and the main budget expenditure will be R1826.6bn, with a budget deficit of R242.7bn (up from the 2018 budgeted deficit of 3.6 % to an estimated 4.5%of GDP).

While the ACDP does not support further bail-outs to State owned companies (SOCs), clearly urgent steps are necessary to stabilize the SOCs given the state guarantees that are at risk. R5bn has already been given to SAA, and we note that R3.5bn has been obtained by SAA from banks to continue financing capital requirements until June. The airline also has to pay R1.2bn to Comair in damages for anti-competitive practices. SABC is looking for R3bn. Government has raised contingency reserve to R13bn to respond to possible requests for financial support from SOCs.

The ACDP also notes that government is not going to take over Eskom’s debt, but that R23bn per year for three years will go to support Eskom during the reconfiguration. The bail-out was necessary in the short-term, given that Eskom’s R419bn debt presents the most significant threat to state finances. We believe however, that the ANC –government must be held accountable for the poor financial and operational state of Eskom. It is disgraceful that this once globally acclaimed power utility is facing these challenges, which are largely attributable to state capture and corruption over many years. Why should the tax-payer be responsible for bailing out Eskom, and for that matter, other SOCs (such as SAA and SABC, when industrial scale looting has been permitted unde3r the ANC-government’s watch. Some estimate that the debt restructuring and recapitalization package could be as much as R200 billion.

While we welcome the appointment of an independent Chief Reorganisation Officer at Eskom, a new white paper on the future of Eskom and the energy sector is required, with particular reference to what a proposed unbundling would achieve. We tend to agree with the Minister that “pouring money directly into Eskom in its current form is like pouring water into a sieve.”

Further long-term risks to the fiscus are presented by Free Higher Education, the NHI and the substantial R200bn liabilities of the Road Accident Fund ( which are set to increase dramatically with the introduction of a no-fault scheme). It is also clear that the National Health Insurance programme is unaffordable at this stage. Even the pilot programmes have not been implemented properly. It is crucial to get the existing public hospitals and clinics working properly, with properly trained doctors and nurses.

The ballooning public sector wage bill is unsustainable and poses a serious risk to the expenditure ceiling and fiscal consolidation path. The ACDP welcomes steps announced to reduce the number of public servants.

The ACDP urges the Minister to find additional funding to fund the new directorate within the NPA to investigate and prosecute state capture and corruption-related matters. Additional funds allocated to the Asset Forfeiture Unit and Special Investigating Unit would be money well-spent as these units are well-placed to recover stolen state funds and to cancel unlawful state contracts.

The ACDP will be studying the Budget proposals in greater detail over the coming weeks.


ISSUED BY: STEVE SWART MP

20 February 2019