In his inaugural budget speech Minister of Finance, Tito Mboweni painted a bleak picture as the country struggles with deteriorating economic indicators, a flagging fiscus and the potential looming economic catastrophe that is our State owned enterprises, especially Eskom. Not only did the Minister say that the economy was only expected to grow by 1.5% this coming year but he also revealed that our national debt continues to rise and has now reached 56.2% measured as the debt to GDP ratio. In other words, the country owes its creditors an amount of money equal to 56.2% of the value of all goods and services produced in our economy!
Interest on the national debt will reach R209.4 billion this year and is the fifth biggest expenditure item in the national budget after education, social grants, health and community development. What room then for expenditure earmarked to boost economic growth and create jobs. Sadly, not very much is the answer. Making matters worse, our budget deficit (the amount by which expenditure exceeds revenue) has climbed to 4.5% of GDP, up from the 4.2% forecast in the October mid-term statement. State expenditure now exceeds R1.83 trillion a whopping R1.1 trillion of which goes to social services. Add to that the fact that the public sector wage bill has now reached an “unsustainable” (the Minister’s words) 34.4% of consolidated expenditure.
Minister Mboweni said that his budget was based on achieving higher economic growth, increasing tax collection, committing only to affordable expenditure, reducing debt, reconfiguring state-owned enterprises and managing the public sector wage bill. These are sound fundamentals that he hopes will not only improve levels of business confidence and perceptions of the ratings agencies but also begin to turn around an economy hamstrung by years of economic stagnation and the ravages of the era of “state capture”.
In line with these goals Minister Mboweni announced a host of measures intended to increase revenues and decrease expenditure. Increases in “sin taxes”, export taxes on scrap metal, reducing staffing in diplomatic missions, placing a moratorium on salary increases for MPs, MPLs and SoE executives, increased fuel levies, increased sugar tax, the introduction of a gambling tax, taxing e-cigarettes, are all examples of these measures. One, the offer of early retirement on full pension benefits to those public servants in the age group 55-59 is unprecedented. This is expected to result in a reduction of around 30 000 personnel and while it will cost the State an unplanned expenditure of R16 billion it is expected to reduce the public sector wage bill by R20 billion over the next three years. A further related cost saving of around R23 billion is expected over the same period.
Sadly however, much of the cost savings that the Minister aims to achieve will be undone by the costs of rescuing Eskom and other ailing SoEs such as SAA, Denel and the SABC. Be under no illusion readers, the ailing, debt stricken former playground of the chief exponents of state capture is going to cause many headaches for the foreseeable future. While it is good news that the President recently announced that Eskom would be split into three companies, responsible for generation, transmission and distribution, the Minister of Finance’s failure to indicate how this split will work and how the assets and liabilities will be apportioned between them was notable, but perhaps not unexpected.
Alarmingly, Moody’s the ratings agency has signalled that more detail is needed in the form of a credible and detailed plan for Eskom’s reconfiguration before it would revise its outlook for the troubled power utility and the country. Perhaps the Minster’s announcement that Treasury is setting aside R23 billion per annum for the next three years to financially support Eskom during its reconfiguration will go some way to ensuring a successful outcome but there are no guarantees. Somewhat unexpectedly, the Minister of Finance has made it clear that government is not taking on Eskom’s debt which now stands at around R420 billion! No new government guarantees will be issued to prop up Eskom.
Oh and where is the good news? There wasn’t much but the Minister tells us that there will be no increase in personal taxes, but no revision of tax brackets means that those that get wage or salary increase may find themselves in a higher tax bracket consequently paying more tax than they do now. While fuel levies have increased they have increased at below inflation rates hopefully negating in part consequent consumer price rises. And while there has been no relief for struggling consumers through a reduction in VAT, white bread flour, cake flour and sanitary pad will soon be zero rated for VAT, some relief for those who consume these essentials. Small increases were also announced in pensions and social grants.
In short, this was something of a doom and gloom budget. But at the very least, there now appears to be a real appreciation of what needs to be done. A sea change since the Gigaba budget of 2018!
In the final analysis, Budget 2019 was directly and indirectly all about Eskom!