A proposal to cut the state’s wage bill by R160.2 billion over three years as Treasury warns of ever-rising debt repayment costs was one of the key announcements in the 2020 Budget.
“For the credibility of our fiscal stance, that R160 billion or so needs to be found,” Mboweni told journalists at a pre-Budget briefing.
The proposal will anger unions which have warned against wage cuts.
Mboweni presented the Budget in an environment of low economic growth, a rising budget deficit and record-high unemployment.
“We won’t get everything that we need,” he told reporters, saying SA was in a difficult fiscal position.
“[But] we are not at a point of austerity, we are at a point of cleaning up our house,” he said.
There will be no major tax increases apart from annual hikes in fuel and Road Accident Fund levies. Treasury said new tax increases could “harm the economy’s ability to recover”.
Despite speculation by some pundits, VAT will not increase.
“In this difficult economic situation, it would be foolhardy to introduce a [VAT] hike,” said Mboweni.
Taxpayers will get a measure of relief from above-inflation adjustments in personal income tax brackets, while Treasury says it also intends to lower the corporate tax rate to make SA more competitive.
Treasury now expects the economy to grow by just 0.3% in 2019.
Here is what you need to know:
Public sector wage bill takes centre stage
Last year, the finance minister announced the introduction of measures to realise an R27 billion reduction in the state salary bill over three years by incentivising early retirement in the public sector. This year, the cuts are going far deeper. National Treasury is now proposing is an R160.2 billion cut in the wage bill for state employees in national and provincial departments over three years.
Some form of cut to the state’s wage bill was largely anticipated by analysts, who noted ahead of the Budget that the state had struggled to reduce spending by other means to stop the gap caused by weaker-than-expected tax revenues.
While Treasury has promised rating agencies that government is serious about lowering the bill, unions say that the bill is not excessive and bigger savings can be achieved elsewhere.
In its Budget Review, Treasury said civil servants’ salaries had grown by 40% in real terms over the past 12 years, “without equivalent increases in productivity”. The proposed cut in the wage bill is sure to set up a showdown with unions.
Labour federation Cosatu is already saying the reduction of wages to cut costs would “never be accepted”, and threatened to break with the ruling ANC if cuts went ahead.
Mboweni told journalists on Wednesday that the Minister of Public Service and Administration was leading negotiations between government and unions.
“I think we will find each other,” he said.
There’ll be some tax relief and no hike in VAT
Ahead of the Budget, there was some speculation by economists that the state would implement a hike in the VAT rate from 15% to 16% to cover its shortfall in funding.
And while Treasury announced on Wednesday that its projected tax shortfall (compared to 2019 Budget estimates) had grown to R63.3 billion, VAT will not be increased.
“New tax increases at this time could harm the economy’s ability to recover,” Treasury said in its Budget Review.
Instead of a VAT hike, South Africans will be getting tax relief via above-inflation adjustments in personal income tax brackets.
As expected, there were increases in the fuel and Road Accident Fund levies
Treasury said that in light of poor economic growth – it now estimates GDP growth of just 0.3% in 2019 – “substantial tax increases are unlikely to be effective”. It also hiked the limit on contributions to tax-free savings accounts from R33 000 to R36 000.
Corporate income tax may be lowered
Treasury also announced that in an effort to promote economic growth, it intended to reduce SA’s 28% corporate income tax rate. It did not say when this would occur. Treasury argued that many of SA’s key trading partners had reduced their corporate tax rates, which meant a decline in SA’s relative competitiveness.
Social grants to increase in line with inflation
Grants will increase by between 4% and 4.7%. For example, the old age grant will be hiked from R1 780 per month to R1 860, while the child support grant will go up from R425 to R445.
Debt still the fastest-growing item of expenditure
Debt interest costs now account for 15 cents out of every R1 that South Africans pay in taxes, while debt repayment continues to be the fastest-growing expenditure item in the budget. Treasury expects SA to pay R229 billion in debt-servicing costs in 2020/21, which would make it the third-largest item on the state’s Budget, behind only basic education and health. Debt servicing costs are now larger than the budgets for police, defence and law courts and prisons. SA’s gross loan debt, meanwhile, is expected to reach 71.6% of GDP in 2022/23.
National Health Insurance gets a few mentions
President Cyril Ramaphosa devoted his most recent weekly newsletter to outlining the case for National Health Insurance (NHI) – saying it is “one of the greatest travesties of our time” that access to quality healthcare is determined by income level.
While health remains one of the largest items in the Budget – with a total proposed expenditure of R229.7 billion in 2020/21 – there was little new about NHI in the Budget, apart from R55.6 million in new funding prioritised to the Department of Health to “strengthen its capacity to phase in NHI”, and a separate R25 million grant to the National Quality Health Improvement Plan.
State Bank may be Postbank
In his State of the Nation Address earlier in the month, Ramaphosa announced that Mboweni would provide details on the creation of a new state bank in his Budget. Ramaphosa said the bank would “extend access to financial services to all South Africans”, without providing additional details. Mboweni, meanwhile, tweeted last week that the bank would be a “deposit-taking institution”.
Treasury noted in its Budget review that Postbank was applying for a banking licence, following the passing of legislation in 2019 to allow state-owned entities to apply for licences. The decision now rests with the Prudential Authority.
“The design of any state bank will protect the fiscus in the event of poor governance, non-performing loans or shortages in capital funding”.
Deputy Minister of Finance David Masondo told journalists the state was aiming to consolidate the proliferation of “quasi” state banks, such as Postbank, into a single bank, which would be a deposit-taking institution.
Sovereign Wealth Fund may source funds from the sale of spectrum
In a short statement, Treasury said it was conducting a feasibility study for the fund, saying that a possible source of funds was proceeding from the allocation of spectrum and the “sale of non-core assets”.
It added that a fiscal rule that saves fiscal surpluses in the fund could help manage volatile revues.
Economic outlook still grim
Last year, Treasury projected that SA’s economy would grow by 1.5% in 2019.
Treasury now expects the economy to grow by just 0.3% in 2019, less than a tenth of the 5% annual growth called for in the National Development Plan. The impact of low growth on revenue projections was “considerable”, forcing a downscale and borrowing at a greater rate.
As Eskom continues to implement intermittent load shedding and intends to continue for the next 18 months, Treasury said electricity shortages would continue to constrain spending over the medium term.
Mboweni said his reading of the situation was that the rating agencies would react to how they read the country’s fiscal stance.
“Although the deficit rises to 6.8%, we are nevertheless determined to put in back in the outer years,” he said.
“How will Moody’s react? I don’t know but I don’t think they will rerate us on the basis of the fiscal stance”.
“They may give us a bit of a klap (slap) which we will absorb because we have already klapped ourselves.”
Moody’s Investor Service is the sole major global rating agency that has not yet downgraded SA’s sovereign credit rating to junk. In a recent Bloomberg survey, of 19 surveyed economists, 14 expected Moody’s to downgrade the country to junk this year. Nine of those said it would happen in the first half in 2020.
If Moody’s joints S&P and Fitch in downgrading SA to junk, the country’s bonds will be forced out of the large Citigroup World Government Bond Index, leading to an outflow of billions of rands.