There is nothing left in the tank. The unpalatable truth is that as a nation we spend more than we earn. We are on a course to spend more to service debt than we will spend on healthcare. SOEs are foundering on the rocks of corruption, demanding massive bailouts to become going concerns again and government officials and Cabinet members are living off what is left of the cream in the form of inflated salaries and other perks. All these scenarios were touched on one way or another in the Medium Term Budget Policy Statement (MTBPS) tabled by Finance Minister Tito Mboweni yesterday, but solutions were generally absent, reports Legalbrief. Unsurprisingly, the rand took a hit, suffering its biggest drop in nearly 14 months – 2.59%, pushing it through the R15/$ level for the first time since 10 October. The grim figures show consolidated government expenditure will reach R6.3trn over the next three years, of which R796bn will be going towards servicing the country’s debt, which is now at R3trn and will balloon to R4.5trn in the next three years. Debt is ‘increasing at an unsustainable pace’, said Mboweni, but the tough decisions to arrest this have been kicked into touch. It’s a sign the political contestation in the ANC is far from settled, suggest some media reports. In fact, as noted in a Daily Maverick assessment, much of what Mboweni had to say seemed to be aimed at Cabinet colleagues to bring home how bare the cupboards really are. The numbers are shocking, and Mboweni didn’t mince his words. The question, notes Legalbrief, is this: Is anybody in government listening?
The MTBPS was long on facts, short on answers, observes Legalbrief. Mboweni said depressed economic growth, a projected tax shortfall of R53bn and multiple bailouts for SOEs had reduced room for the state to boost spending on its key priorities like education and health, notes Fin24. And according to TimesLIVE, he warned that SA will be caught in a debt trap if urgent and drastic costs cutting measures are not put in place. ‘The consequences of not acting now would be gravely negative for SA. Over time, the country would likely face mounting debt service costs and higher interest rates and may enter a debt trap. The unemployment crisis will worsen, and government debt could balloon. This is an outcome we are determined to avoid,’ he said. He added the debt-to-GDP ratio was of major concern as it should be hovering around the 30% mark, or ideally be at zero. He listed a number of ‘fiscal leakages’ or wastage which he said National Treasury was clamping down on with a raft of cost saving interventions. Among these are banning government from issuing civil servants with cellphones which cost around R5bn a year; containing the wage bill through lower than inflation increases and reviewing occupation specific dispensation allowances; freezing the salaries of Ministers, MECs and mayors and forcing them to travel economy class on local trips (more on this in POLICY WATCH section below).
Ratings companies and financial markets may be left disappointed by the lack of details on action to reverse the downwards spiral. Much of the hard decisions on spending and potential tax changes have been deferred to the main Budget, normally unveiled in February, notes a Business Day report. The government pencilled in just R21bn of spending cuts for 2020/2021, less than the R33bn allocated to Eskom for that year. ‘We cannot continue to throw money at Eskom,’ Mboweni said in his speech (see report below). In what the report views as a sign that the Treasury has yet to win political support across the government for measures that it says are needed to get state finances on a more sustainable path, including R150bn in spending cuts and revenue raising over three years, it emphasised the dire state of government finances and the need to act urgently, partly in the hope that the grim forecasts will act as a wake-up call for other departments. Moody’s Investors Service, which is due to give a scheduled update on SA’s rating tomorrow, may see this as another sign of government kicking difficult decisions down the road. No ratings cut is expected, though the agency may change the outlook from stable to negative.
While Mboweni’s statement was notable for its lack of specific measures, it flagged possible tax increases and reining-in the growth in public sector wages as possible ways of addressing the deterioration in public finances, says Business Day. Mboweni said discussions would have to take place with labour about the public sector wage bill between now and the February Budget. Mboweni noted that 29 000 public servants – in addition to Cabinet Ministers, MPs and members of the provincial legislature – earned more than R1m last year. The average wage increase across the government was 6.8% in 2018/2019. After adjusting for inflation, the average government wage has risen by 66% in the past 10 years and the wage bill accounts for 35% of the consolidated budget. Another Business Day report says Mboweni also wants action to be taken against some former Cabinet members responsible for the unsustainable public service wage bill. In a media briefing ahead of delivering the MTBPS, Mboweni specifically cited former Ministers of Public Service & Administration Faith Muthambi and Richard Baloyi, who both served under Jacob Zuma. ‘Let’s call a spade a spade … they signed agreements outside their mandate. They got us into this mess,’ Mboweni said. Mboweni said for every R100 the state collected in tax revenue, R46 was spent on paying the salaries of public servants.
Mboweni took the tough love option on Eskom’s financial woes, saying he wanted to see reforms before the utility could get more financial support. Eskom, which has R450bn of debt that it is unable to service, has said that it needs to be relieved of R250bn debt to be sustainable, notes Business Day. The only financial support allocated to Eskom is the existing bailout package of R23bn a year for the next decade announced at the February Budget. Some of this – R128bn in total – will be front-loaded over 2019 and 2020, with an extra R10bn also being added to the 2021/2022 allocation. Mboweni told Parliament that Eskom needed to ‘run their current plant and equipment better; achieve other operational efficiencies, including better cash management; and fast-track the separation of the utility into three parts’. ‘Eskom is a business and must be run that way … once I am convinced that the Eskom board and management has made an irrevocable commitment to implement government’s decisions and there is enough progress, we will negotiate the appropriate size of debt relief,’ he said.
The news for SAA was marginally better. The government will pay off the remainder of SAA’s debt, which stands at R9.2bn, over the next three years. But Mboweni made his feelings on the loss-making airline clear, saying: ‘How long are we going to be on this flight path? Forever? I think not. Operational and governance interventions are required urgently!’ Business Day noted Treasury official Tshepiso Moahloli said that SAA continued to burn about R500m a month. The board of the airline had committed to turning the airline around, dependent on government support of R21.7bn. With the R9.2bn now taken care of, government support has now reached that threshold, she said.
Moneyweb notes Mboweni made the point that SAA is unlikely to ‘ever’ generate sufficient cash flow to sustain its operations in its current configuration. So he was pleased to learn there were conversations involving SAA and potential equity partners, which would ‘liberate the fiscus from this SAA Sword of Damocles’. National Treasury admitted that several large SOEs are in crisis as a result of governance failures, poor operational performance and resultant unsustainable debt burdens, and are adding to the spending pressures on government. It said R10.8bn in funding for SAA, the SABC, Denel and South African Express in the current year had wiped out almost the entire contingency reserve for 2019/20. Mboweni said other state-owned companies that require support from the fiscus will be subject to certain preconditions and principles, including that managers and their teams should not receive bonuses or salary increases when they fail to meet basic financial targets and service objectives, but in fact should take a pay cut and – in some cases – be relieved of their duties.
The NHI didn’t escape the outpouring of dire news. Treasury said government’s original estimates for implementing NHI are unaffordable in the current fiscal environment, and even a limited package of reforms will require an extra R33bn on top of the existing health budget from 2025/26. BusinessLIVE notes officials remained tight-lipped about how the ambitious plan is to be financed, saying only that discussions were still under way at a political level. ‘Originally, NHI costs were projected to increase public health spending from about 4% to 6% of GDP over 15 years. However, given the macroeconomic and fiscal outlook, the estimates to roll out NHI that were published in the NHI Green Paper in 2011 and in the White Paper in 2017 are no longer affordable,’ the Treasury said. ‘In this fiscal environment we had to look at how NHI could still evolve in a more affordable way,’ said the Treasury’s chief director for health and social development, Mark Blecher. The Treasury has developed an actuarial model with updated fiscal costs and a limited set of interventions intended to strengthen the health system. These include contracting with private sector GPs, extending the chronic medicine distribution programme, expanding the HIV treatment programme, scrapping user fees at public hospitals, tackling medico-legal claims and establishing the NHI fund, said Blecher. The model puts the funding shortfall associated with the limited package at R33bn (in 2019 terms) in 2025/2026, rising to R50bn in 2030, he said.
The NHI is facing another hit in the February Budget via the slashing of grants, according to a report in Die Burger. It quotes Blecher as saying Treasury still has to engage with the Health Department about the costs model, which is only half of the amount the department had hoped for, but the indirect NHI grants will probably be slashed in February due to ‘chronic underspending’ by the department. Rapport has reported that one of the indirect grants from last year – R150m for linen and beds – was 100% unspent, according to the department’s annual report submitted to Parliament last week. It also received a R200m grant for critical oncology services that faces scrutiny by the Human Rights Commission, but spent only R76m. Of the R80m special NHI grant for mental health, the department did not spend a cent. The only NHI grant being used optimally, according to the report, is the salary grant. The NHI project already employs 154 people, according to the annual report.
The battle to ditch e-tolls appears to have been lost, although this wasn’t absolutely clear, notes Legalbrief. It seems, though, that Transport Minister Fikile Mbalula and Gauteng Premier David Makhura will have to bite the bullet after Mboweni refused to do away with the ‘user-pay principle’. He said the Gauteng e-tolls were here to stay in their current form, which means road users are still expected to pay, observes TimesLIVE. He said after considering several options to resolve the impasse over the Gauteng Freeway Improvement Project, the government decided to retain the user-pay principle. Mboweni said the non-payment of tolls had already led to roads deteriorating as there was no money to maintain the network. ‘People must appreciate the service provided and just like they go to Pick n Pay to buy bread, they will pay for the use of this service,’ he told journalists ahead of delivering his speech. However, during his speech, Mboweni appeared to be back-tracking, saying the discussions with Mbalula and Makhura were still ongoing, and the outcome will be announced by Mbalula at a later stage. But Mboweni urged the nation to pay its bills, saying SA needs to build a culture of payment, as government services could be sustainable only if all those who can pay for services did so.
This news has upset the Automobile Association, which responded: ‘We find it hard to believe that based on submissions government received, anyone apart from Sanral supported the idea of retaining the current system. We have data that indicates users will continue not to pay – and that the system is doomed to failure should it be kept in its current format.’ According to TimesLIVE, the association said continuing with a ‘business as usual’ approach is counter-productive, particularly when ‘business as usual’ is not only not working, but is a dismal failure.
The Reserve Bank was singled out for praise for declaring increased profits to the government – even if the state does not fully own the bank. According to TimesLIVE, Mboweni said the bank had not only kept inflation stable but also delivered good profits, contributing R200m to state coffers in profits from its operations. ‘The bank is a strange creature: even though we do not own it, the National Revenue Fund receives 90% of their profits, after provisions ordinarily made by bankers. It is a beautiful arrangement – we do not have to invest any money in the Bank but we get all the profits, plus taxes,’ he said. The report says Mboweni’s praise of the bank has been seen as a tacit jab at critics of the bank’s ownership structure – many in his own ANC, who have been campaigning for the nationalisation of the bank.
What about the good news? There was not much to cheer about, notes Legalbrief, but the NPA, courtesy of ‘reprioritisation’, will get an additional R1.3bn and SARS an additional R1bn for the next two years. ‘These funding shifts will bolster efforts to combat corruption and improve revenue collection,’ said Mboweni. Business Day notes that making more funds available for the NPA is critical, especially in the light of NDPP Shamila Batohi telling the Portfolio Committee on Justice & Correctional Services in July that without urgent intervention it would be ‘extremely difficult to meet the demands on the NPA’. While his appointments of Batohi and Hermione Cronje, the head of the new investigating directorate, have been hailed, the critique has been that the government has not put its money where its mouth is in the fight against corruption. ‘From the 2020 medium-term expenditure framework period onwards, funding will be re-allocated from the SAPS to other departments and entities within this function to implement the integrated criminal justice strategy,’ the MTBPS said. Some of these funds will be used to improve prosecution capacity, including for the sexual offences and community affairs unit that focuses on violence against women. Funds will also be used to finance various corruption-fighting units and to combat cyber-crime. ‘Funds will also be re-allocated to the Directorate for Priority Crime Investigation (Hawks) to appoint additional investigators to address the backlog of corruption cases, and to the Departments of Defence and Home Affairs to enhance border security.’ Batohi said she was extremely heartened by the additional budget injection. ‘The budget will go a long way in addressing the major capacity and skills constraints the NPA is facing and will contribute to improving morale and the service delivery environment for prosecutors,’ she is quoted as saying.