Clear signs of SA’s deteriorating finances writ large in medium-term budget

Ominous warning signs that the country’s finances have sharply deteriorated were cemented in finance minister Tito Mboweni’s medium-term budget policy statement (MTBPS) on Wednesday.

It revealed deep revenue shortfalls, continued spending pressure on state-owned entities (SOEs) and ballooning government debt levels in the coming years.

The bleak outlook could deteriorate further, Mboweni warned, if a number of risks to the fiscal framework materialised, and which the government “has to confront head on”. 

These included the expectation for debt sustainability if economic growth worsens, the financial positions of SOEs like Eskom worsen and if the government fails to curb spending, particularly on the public sector wage bill.

The Treasury flagged that the risk of a sovereign credit rating downgrades has now increased since February, as low economic growth and high government debt, compounded by support for SOEs, has persisted.

Moody’s Investors Service is due to announce its credit review on Friday, with economists before the medium-term budget expecting that the agency could downgrade its outlook on SA sovereign debt from stable to negative, but leave the rating at one notch above subinvestment grade.

As tax revenue collections have disappointed, both due to weaker economic growth and governance problems at SA Revenue Service (Sars), and spending pressures remain, the budget deficit has widened sharply

The 2019/2020 consolidated budget deficit is now at 5.9% of GDP compared with 4.5% of GDP in the 2019 budget. It is expected to rise to 6.5%, 6.2% and 5.9% in the coming three years.

The in-year tax revenue shortfall is now expected to be R52.5bn, down from what was budgeted in the main budget.  The 2018/2019 revenue shortfall was R57.3bn — the largest under-collection since the global financial crisis.

The Treasury has also revised down the expected growth for some of its major tax bases. Along with the shortfall for the 2019/2020 year, tax collections for 2020/2021 are expected to be down R84bn on February’s estimate, and down R114.7bn in 2021/2022.

As spending continues to outstrip tax income, government debt levels are expected to soar to sustain the deficit.

Debt to GDP is expected to increase to 60.8% of GDP in 2019/2020 and to 71.3% by 2022/2023.

“The debt-to-GDP ratio is beginning to reach unsustainable levels…. [This] is a very serious matter that we need to attend to,” Mboweni said in a press briefing to journalists ahead of his speech.

The Treasury highlighted the risks to debt management, saying that a 10% change in interest rates, the rand-dollar exchange rate or inflation would mean that the cost of financing its borrowing requirement would rise, while SOEs are likely to find it difficult to refinance existing debt or issue new debt.

In an effort to stabilise debt, the government is targeting a primary balance — in other words, it is aiming to get its revenue equal to non-interest expenditure — by 2022/2023. This will exclude support for Eskom.

To achieve this target, the government needs to find additional measures to raise R150bn over the three years, either through spending cuts or additional revenue.

The 2019 budget included R10bn in tax increases in the coming year, with details to be provided in the 2020 budget.

But Treasury officials have indicated that given the deeply difficult fiscal position there “are no holy cows” and further tax increases cannot be taken off the table completely.

Sars commissioner Edward Kieswetter said that rebuilding programme at the tax authority aims to close the gap between what it is collecting and its targets. 

He said the agency’s entire leadership team has been affected. Of the nine top leadership posts, four have been placed on precautionary suspension, with four filled in an acting capacity, while only one chief officer is permanent.

donnellyl@businesslive.co.za