Medium Term Budget Policy Statement 2019

The 2019 MTBPS has been resented by Minister Tito Mboweni. His opening statement was a reference to the Aloe Ferox plant he brought to Parliament when presenting the February 2019 budget.

“This little aloe is emerging from a long winter. During that winter, the ground became hard. The leaves fell from the trees and the air was bitterly cold. We toiled, hoping for better days. Our people became poorer. Some lost their jobs.”

Cecil Kilpin | CA(SA) - Accounting & Auditing Specialists >> November 2019 Newsletter

The above statement sums up his presentation. The key points are as follows:

  • Economic growth is projected at 0.5 per cent for 2019, as long‐term growth estimates have fallen. As a result, revenue projections have been sharply reduced. Spending pressures continue to mount, led by the public service wage bill and state‐owned companies in crisis. The 2019 MTBPS proposes an approach over the medium term that will restore economic growth and stabilise the public finances.
  • Over the next three years, consolidated spending will total R6.3 trillion, with 48 per cent of this amount going towards social grants, education and health. Revenue shortfalls and rising spending pressures are threatening government’s ability to maintain existing levels of service provision and infrastructure investment.
  • The consolidated budget deficit averages 6.2 per cent of GDP over the next three years. Debt and debt‐service costs will continue to increase, with the debt‐to‐GDP ratio now estimated at 71.3 per cent in 2022/23.
  • Government has clawed back some of the revenue shortfall through reductions to departmental baselines and slower spending growth in 2022/23. Alone, these reductions are insufficient. Additional measures, particularly on the wage bill, will be required to stabilise the debt outlook and improve the composition of spending. Additional tax measures are also being considered.
  • In August 2019, the paper released by the National Treasury outlined short‐ and medium‐term reforms that can boost economic growth, many of which do not require significant state resources. Interventions to improve the quality of infrastructure planning are beginning to show some results. Further measures to reduce wasteful expenditure will be implemented in the coming year.
  • Government is providing medium‐term support to Eskom to secure energy supply and to honour the state’s contractual obligations. The National Treasury, in partnership with the Department of Public Enterprises, is instituting a series of measures to bring discipline to the utility’s finances, and to step up the timeline for restructuring. Debt relief will only be considered once operational efficiencies have been achieved.

In closing Minister Mboweni once again referred to the Aloe Ferox:


“The winter has been long, but we must prepare for spring and reposition the Republic to grow and to thrive. We need to plant good seeds for our country, both now and for future generations”


Promoting Investment and Economic Growth

Policy certainty and a conducive business environment are critical to support the confidence of businesses and households. A robust monetary policy framework has provided certainty but needs to be complemented with a range of reforms that are within government’s control and do not require significant funding. These would help to raise long-term growth. The paper titled Economic Transformation, Inclusive Growth, and competitiveness: Towards an Economic Strategy for South Africa, which the National Treasury released in 2019, has begun a vigorous national debate on the reforms required to raise growth.

Cecil Kilpin | CA(SA) - Accounting & Auditing Specialists >> November 2019 Newsletter

The interventions consider (i) strengthening network industries, such as road and rail, (ii) enhancing South Africa’s export competitiveness to boost exports, employment and innovation, and (iii) promoting greater competition within the economy, enabling small firms to grow and compete with dominant players. Several reforms that do not require significant state resources include:

  • Tourism: reducing the cost of traveling to South Africa, and cutting red tape.
  • Power generation: granting licences for small-scale power generation projects
  • Telecommunication: allowing for the rapid expansion of fibre infrastructure
  • Lowering the cost of doing business: automating various regulatory processes.

Medium-term reforms also need to begin immediately in transport, water, telecommunications, and industrial and trade policy, although they will likely only be completed over the next three years.

Improving the pipeline of infrastructure projects with the Infrastructure Fund:

Over the past year, government has made progress in setting up a blended-finance Infrastructure Fund. The fund’s implementation unit has been established and is housed within the Development Bank of Southern Africa (DBSA). Its aim is to fast-track the development of projects and programmes by drawing on existing capacity in the Presidential Infrastructure Coordinating Commission, the National Treasury, the Government Technical Advisory Centre (GTAC) and the Independent Power Producers Office.

Government set aside R100 billion over a decade to co-finance programmes and projects that blend public and private resources, with R10 billion in the baseline for the next three years. Pilot projects, including the Student Housing Infrastructure Programme and Small Harbours Programme, receive R529.8 million in the current year. The implementation unit is developing a pipeline of projects for funding that includes proposals from government, the private sector and the DBSA. To date, the implementation unit for the Infrastructure Fund has identified possible projects and programmes amounting to more than R500 billion.


Eskom Reforms

In February 2019, the president announced the separation of Eskom into three distinct entities: generation, transmission and distribution. The primary objective being to allow each entity to focus on enhancing efficiency, reducing costs and optimising investment on a specific function, rather than trading off efforts amongst all three. In addition, the capital structure will ultimately be amended to end all reliance of Eskom on government support. Functional separation to wholly owned subsidiaries with independent Boards is scheduled to be complete by March 2020, with legal separation of the distribution and generation functions by December 2021.

Cecil Kilpin | CA(SA) - Accounting & Auditing Specialists >> November 2019 Newsletter

For the next 3 years, the support to Eskom has been revised as follows:

  • 2019/20: R49 billion – an increase of R26 billion from the 2019 budget baseline
  • 2020/21: R56 billion – an increase of R33 billion from the 2019 budget baseline.
  • 2021/22: R33 billion – an increase of R10 billion from the 2019 budget baseline.

These amendments represent the amounts set out in the Special Appropriation Bill in July 2019, to stabilise the periodic cash flow crises that it faces in meeting its financial obligations. For the 2018/19 financial year, R13.5 billion has been transferred to date.

Risks for increased government support:
The major risks faced which will require increased government support are (i) the ability of Eskom to issue debt on financial markets, and (ii) the cost of doing so becoming prohibitively expensive. The cost of Eskom’s annual debt and interest payments total an average of R85billion over the next three years.

Preconditions for debt relief:
Eskom’s unsustainable R441 billion debt portfolio as at 31 March 2019 requires both government support to reduce the level of debt, as well as in addressing the underlying causes. Key challenges that the Utility continues to grapple with are the failure of municipalities and other entities to pay their bills, as well as tariff determinations from the National Energy Regulator of South Africa that do not allow the utility to cover its costs. It is recognised that debt relief will only provide temporary resolve for the loss-making utility and will therefore only be considered once operational efficiencies have been achieved. The preconditions for the Eskom board are to:

  • Demonstrate progress in rigorous and disciplined cash management.
  • Show that each business unit’s operations are managed within their means.
  • Create the three distinct functional entities, prioritising separation of the transmission function.
  • Appoint new Boards and CEOs who are accountable for the independent operation of each entity.


Stabilising Public Finances

Large fiscal deficits incurred over the years, although providing short-term support to the economy, have not resulted in commensurate long-term economic growth. This has led to sharp increases in the government’s debt-to-GDP ratio, which currently stands at 60.8 per cent, and is expected to rise to 71.3 per cent in 2022/23. The growing proportion of limited public resources spent on interest payments are crowding out spending on social and economic investment.

Cecil Kilpin | CA(SA) - Accounting & Auditing Specialists >> November 2019 Newsletter

Although options to stabilise the fiscus are becoming increasingly limited, The MTBPS suggest the following three core focus areas:

  • Reducing the public service wage bill, which currently accounts for 46 per cent of tax revenues. Salaries for public servants has increased by 40 per cent in real terms over the last ten years. Options considered include (i) pegging cost-of-living adjustments at or below CPI inflation, (ii) halting automatic pay progression and (iii) reviewing occupation-specific dispensation for wages.
  • Additional tax measures are being considered, despite several years of increases. Currently the tax-to-GDP ratio is 26.4 per cent, close to the peak reached in 2007/08, leaving little room for expansion. The 2019 Budget has already stipulated a R10 billion in tax increases for 2020/21, and this will be expanded in the 2020 Budget.
  • Reduce future transfers to state owned enterprises, including the disposal of non-core assets and options for private sector participation.
  • Improved spending efficiency and reduction of waste. Some of the mechanisms include the consolidation of entities and regulatory agencies, disposal of unused land and other assets, and the limitation of claims against the state (including a review of medico-legal claims and prioritising the implementation of the Road Accident Benefit Scheme).

Underpinning all of these is an effort to combat corruption and improve existing revenue collection. This will be enacted through a reprioritisation of funding tabled to the National Prosecuting Authority of an additional R1.3 billion, and the South African Revenue Services of an additional R1 billion for the period from 2019/20 to 2022/23.


Sincerely,

Cecil Kilpin | CA(SA) - Accounting & Auditing Specialists >>Newsletter Greeting