21 Feb 2019
South African Budget 2019 – tough position but no real surprises
By: Bradley Mitchell, Head: Research, Sasfin Wealth
As expected, the 2019 National Budget was one of the toughest, and most likely one of the most important, any finance minister, in South Africa’s democratic history, has had to deliver. In light of the upcoming National Election, the Finance Minister’s cautious approach in a high-risk environment came as no real surprise.
However, while government's central economic policy goal remains to accelerate inclusive growth and create jobs, while ensuring sustainable finances by containing the budget deficit and stabilising public debt; the reality is that South Africa’s fiscal position has worsened materially compared to 2018, with budget deficit and debt ratios deteriorating in the medium term. Government’s revenues simply continue to fall further short of persistently higher expenditure, which has been growing faster than expected.
Unfortunately, the economic growth outlook has weakened since the 2018 medium-term budget. On the back of disappointing economic performance in 2018, moderating global growth, a fragile recovery in household spending and uninspiring fixed investment spending, Treasury had to revise its GDP growth expectations considerably lower to 1.5% for 2019, from its previous estimate of 1.8% in the 2018 National Budget.
Treasury noted that structural reforms and a far more competent state would be required to improve confidence in the economy, which in turn would help raise economic growth meaningfully.
Initiatives to boost growth
South African growth expectations remain well below that of emerging market peers and rank towards the bottom of African countries. The World Bank recently projected that South Africa’s economy would only expand by 1.3% in 2019, putting it among the worst performers in sub-Saharan Africa.
The lack of any plan, let alone a feasible one, to create meaningful economic growth remained a major concern, particularly as Treasury has no room to inject stimulus into the economy. This could have included government assuring businesses and investors alike of a commitment to property rights, particularly in the context of expropriation without compensation; continued focus on retaining inflation targeting and reassuring confidence in the continued independence of the Reserve Bank.
Fuel levy hike and carbon tax
The fuel levy was increased by 29c/litre for petrol and 30c/litre for diesel. This consists of 15c/litre in the General Fuel levy and 5c/litre increase in the Road Accident Fund levy, both of which are included in the price of petrol and diesel. The balance of the increase is the introduction of the carbon fuel levy. These levies now make up more than 40% of the total cost of a litre of fuel.
Minister Mboweni also announced that 1 June 2019 would be the implementation date of the new carbon tax on companies.
Measures will be introduced to achieve an estimated R27bn reduction in the state salary bill, over three years, by incentivising early retirement in the public sector. However, the expansion of social protection expenditure appears to remain a non-negotiable, with no cuts emerging; which is perhaps understandable until structural changes translate into improved business confidence, employment and ultimately economic growth.
Real growth in non-interest expenditure is expected to average 2% per annum over the next three years. The fastest-growing area of spending is community development, which includes funding for free basic services and human settlements. Over the next three years, more than half of government spending will be allocated to basic education, community development, health and social protection.
Government has to lift the expenditure ceiling (in relation to non-interest expenditure) by R14bn in FY20 to accommodate additional funding required for the restructuring of Eskom.
Making the grade
Further fiscal slippage along within weak economic growth and further bailouts for troubled SoC’s ultimately result in a dangerous combination from a ratings perspective.
In a pre-Budget commentary, Moody's stated that government financial support to Eskom would be credit neutral as long as it was "accompanied by measures that durably stabilise [Eskom's] financial health". However, the announcement of financial support without announcing additional savings measures would most likely be credit negative for South Africa.
Considering continued SOC underperformance, we believe that a continued strong upward pressure on government expenditure remains likely.