Nhlanhla Nene. Picture: MARTIN RHODES
Nhlanhla Nene. Picture: MARTIN RHODES

Finance minister Nhlanhla Nene is gearing up to announce an economic reform package in October but a tight fiscus has left him little room to manoeuvre.

Data released last week showed that the country entered a recession in the second quarter for the first time in almost a decade. This will see the National Treasury come under increased scrutiny at the medium-term budget policy statement at the end of October.

The recession had posed “additional downside risks” to the tax revenue projected at the beginning of 2018 as well as the Treasury’s growth expectation of 1.5%, Nene said at a conference hosted by the Government Employees Pension Fund on Monday. However, the reform package announced by President Cyril Ramaphosa in July would “reignite growth”, said Nene, who provided no details on how it will be funded.

Citadel chief economist Maarten Ackerman said the recession would see the Treasury revise down its growth forecast well below 1%. “Everyone is poorer, there’s less tax, you’re under pressure from a fiscal point of view and you can’t create jobs,” he said.

Analysts, however, doubt the government has room in the fiscus to include a reform package. “The trick will have to be to reshuffle spending rather than increasing expenditures. There’s no wiggle room,” said Nedbank chief economist Dennis Dykes.

He estimates the package would cost upwards of R40bn, a hefty sum as the shrinking economy raises concern that the government will need to revise its budget deficit higher.

To make up for shortfalls, the Treasury has increased personal income tax in recent years and raised VAT 1% in 2018.

“The Treasury is up against a wall. They cannot raise taxes much more and they’ve already received backlash for the VAT increase. It’s difficult to find where we could cut expenditure,” said BNP Paribas economist Jeff Schultz.

A bigger fiscal deficit would attract the attention of all three credit rating agencies, particularly Moody’s, which still has SA’s long-term foreign currency debt at investment grade, he said. Moody’s said last week SA’s slide into recession would complicate its fiscal and monetary challenges.

A Moody’s decision to push the country’s debt into junk would see SA also fall out of key gauges such as Citigroup’s World Government Bond index, which may prompt investors to dump as much as R100bn of SA assets. “What everyone … can agree on is [that] getting the economy running would solve a whole lot of issues,” said Dykes.

Nene estimates SA would need 5% growth in order to make a dent in the unemployment rate that is nearing 30%.