Against the backdrop of a poor performing economy in a country where expenditure continues to exceed revenue, and our national debt is increasing at an unsustainable pace, Minister Tito Mboweni delivered his medium-term budget policy statement (MTBPS) in Cape Town, on 30 October.
South Africa’s public finances deteriorated over the past decade, a trend that accelerated in recent years as low growth led to large revenue shortfalls, the MTBPS explained.
For 10 years, we have run large budget deficits. While this provided some support to the economy, it has put us deeply in debt, to the point where interest payments have begun crowding out social and economic spending programmes. This cannot be sustained, the Minister said.
The global growth forecast for 2019 is the lowest since the 2008 financial crisis, weighed down by mounting trade tensions and political uncertainty, the Minister explained in the MTBPS document.
“Economic activity in two engines of the world economy, China and India, is slowing this year. Policy makers have taken a number of steps to support growth, but there is a risk that these measures will create new vulnerabilities, as interest rates in advanced economies decline. About a quarter of government bonds in countries have negative yields.”
At home, the MTBPS revealed that economic growth has continued to stagnate and weaknesses in the world economy are likely to amplify the country’s shortcomings, which require structural reforms.
In the first quarter of this year, the South African economy contracted by a revised 3.1 per cent on a seasonally adjusted and annualised basis. As the energy constraint lifted, growth rebounded to 3.1 per cent in the second quarter. These two quarters cancelled each other out, and this year growth has been flat.
“There are some signs that investment spending is strengthening,” the Minister said. “In the second quarter, growth in gross fixed capital formation rebounded to 6.1 per cent. Mining grew by 14.4 per cent. In real terms, credit growth has been positive since late 2018. Private sector credit extension rose 6.2 per cent in September. Home loans grew 5 per cent year-on-year, the fastest rate in some time. But corporate credit extension has softened.”
In September, headline consumer price inflation was 4.1 per cent. Lower inflation is good for everyone, particularly for the poor and the working class.
“In short, it is a mixed picture with some positive signs. It is our job to chart a course that is strategic, sober, careful and inclusive. The economy is now forecast to grow at 0.5 per cent in 2019 compared to the 1.5 per cent expected in February. Growth is projected to slowly rise to 1.7 per cent in 2022, supported by household consumption and private-sector investment.”
To stabilise debt, government will target a primary balance by 2022/23. The target measure excludes support to Eskom, because that is part of a separate process.
As a first step, government has identified spending reductions of R21 billion in 2020/21 and R29 billion in 2021/22 mostly in the area of goods and services, and transfers. In addition, non-interest spending in the outer year of the framework is constrained in line with consumer price inflation.
Government will need to find additional measures in excess of R150 billion over the next three years, or about R50 billion a year. To achieve this, the Minister suggested dealing with the challenges of the wage bill, state-owned companies, executive remuneration and benefits and fiscal leakages.