BUDGET 2019: We are planting a new seed : Mboweni

 

This week Finance News

In his maiden Medium Term Budget Policy Statement in October 2018, Finance Minister Tito Mboweni started his speech with a quote from Charles Dickens’ “A Tale of Two Cities”

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity… we were all going direct to Heaven, we were all going direct the other way…
Mboweni said that is a very similar to where South Africa finds itself today.
“As a country, we stand at a crossroads. We can choose a path of hope; or a path of despair. We can go directly to Heaven, or as Dickens so politely puts it, we can go the other way. For ordinary South Africans, it has become a difficult time. Administered prices, such as electricity and fuel, have risen. Unemployment is unacceptably high. Poor services and corruption have hit the poor the hardest. Under the leadership of our President, and much like the central character in A Tale of Two Cities, we have, as a country, chosen the difficult path of redemption,” Mboweni said.
In his maiden Budget in February 2019, Mboweni said he was planting a new seed as he walked a tight rope between what the ratings agencies would allow before a downgrade and what was needed to provide policy certainty.
There was no way that the Treasury would be able to provide R100bn in debt relief in one go, so instead he provided R69bn spread over three years.
To fund this he would not increase tax brackets to compensate for higher salaries, as well as reducing expenditure by R50bn by reducing the public sector wage bill.
In a nod to his esteemed predecessor Trevor Manuel, who had been the longest serving Finance Minister from 1996 to 2007 and provided plums to the media at the February 2003 Budget, he brought a seed of the aloe ferox, which he said was resilient, sturdy and drought resistant.

Today, I bring you a seed to prove that if we plant anew, we can return to those plum times,” he said in his speech.

In the February 2003 Budget speech, Manuel said the following:

We simply cannot and must not tolerate those who make pensioners wait for hours in the sun because they have not bothered to arrive on time, or those who bring shame to their profession by treating patients and their families callously, or those who abuse the children in their care, or those who could not be bothered to ensure that hospitals have medicines. We cannot tolerate the breakdown in elementary management that results in rundown facilities, leaking pipes, missing textbooks, slow-moving queues, festering bed-sores, lost case files. Those who do not embrace the spirit of Batho Pele should do the right thing and leave the public service. Their lack of commitment and accountability hinder our ability to deliver, and hinder our country’s development. They also undermine the efforts of the many thousands of civil servants who care and work hard to deliver a meaningful service, who have grasped with both hands the new challenge of freedom and whose actions embody this nation’s philosophy for living: Ubuntu. I am because you are. I cannot be free unless you are free.”

Today Mboweni said the Budget was built on six fundamental prescripts:

  1. Achieving a higher rate of economic growth
  2. Increasing tax collection
  3. Reasonable, affordable expenditure
  4. Stabilising and reducing debt
  5. Reconfiguring state-owned enterprises
  6. Managing the public sector wage bill

Treasury has forecast GDP growth rising to 1.5% this year from an estimate of 0.7% last year. Growth then accelerates gradually to 1.7% in 2020 and 2.1% in 2021.

This is however lower than the forecasts given in October’s MTBPS which were 1.7% for 2019, 2.1% for 2020 and 2.3% for 2021.

This is however lower than the forecasts given in October’s MTBPS which were 1.7% for 2019, 2.1% for 2020 and 2.3% for 2021.

It was this downgrade in the growth trajectory that initially resulted in a selloff in the foreign exchange market to R14.37/US$1 from R14.14/US1 before the speech, but once the Brain Dead Oxygen Thieves realised that the Budget was in fact aimed at structural reforms and addressed the issue of debt relief for Eskom in a sustainable way, then the foreign exchange traders reversed direction and the rand ended stronger below R14/US$1.

 

2003 was a watershed year when the South African economy moved from the fiscal austerity of the Growth Employment and Redistribution (GEAR) policy introduced in 1996 to a higher growth path. Both Treasury and the Reuters consensus forecast consistently under-forecast GDP growth in the years 2004 to 2007 and Mboweni will be hoping that in a similar manner, 2019 has the same kind of watershed effect as the government provides regulatory certainty and a conducive investment climate.

In his February 7 State of the Nation Address President Cyril Ramaphosa set a target of getting South Africa to a ranking of 50 by 2022 in the World Bank’s Ease of Doing Business from a current 82.

Treasury said South Africa’s slide in competitiveness reflects both a failure to implement key reforms domestically, and the speed at which peer nations such as Kenya, Mauritius and Rwanda have implemented their own reforms. The deterioration is also in response to corporate scandals, auditing firm failures, widespread corruption in both the public and private sectors, and the perceived erosion of government’s commitment to macroeconomic stability.

In terms of improving tax collection, Mboweni said the Large Business Unit would be relaunched in April 2019, while an Illicit Economy Unit, which was launched in August 2018, will combat the trade in the multi-billion rand illicit trade in cigarettes.

In terms of expenditure, the baseline expenditure has been adjusted downwards by R50.3bn, but this saving was offset by providing debt relief to Eskom of R23bn per year for the next three years, so the net effect is a R16bn increase in the expenditure ceiling.

He quoted Charles Dickens’ Oliver Twist when he said the State-owned Enterprises (SOE) kept coming to him and saying: “Please Sir, may I have some more”, and to cater for this there is a small increase to R13bn in the contingency reserve from zero in this fiscal year.

Treasury will help SOEs to be reconfigured, but the quid pro quo is that if they ask for money, then Treasury will appoint a Chief Reorganisation Officer or CRO. In that respect, Eskom will be the guinea pig and I expect an announcement shortly.

My pick for CRO would be Bobby Godsell as he was previously an Eskom chairman so he knows Eskom, but equally he is a well-respected independent business executive who is used to dealing with contentious labour issues, as a drastic 20% reduction in head count is needed at Eskom to cut costs and ensure sustainability.

In terms of stabilising debt, the Budget projects that it will not exceed 60% of GDP in the next three years.

The public sector wage will be reduced by offering early retirement to public servants. Ordinary public servants can take early retirement at age 55, while teachers can take early retirement at age 45. That is likely to reduce the public sector head count by some 30,000.

In October I said that in my view the Treasury growth projection for the calendar year 2018 is only 6.4%, which is 0.5 percentage points below the 6.9% y/y growth actually achieved in the first half of the year. The economic stimulus plan announced in September and the above-inflation wage awards to civil servants should ensure that nominal GDP growth in the second half of 2018 is higher than the first half.

Now Treasury have increased their forecast for the fiscal year 2018/19 to 7.2%, which is far closer to my forecast of 7.5%. A larger nominal GDP results in higher tax revenue collections.

In summary, I am an optimist and I believe this Budget lays the foundation for a sustainably higher GDP growth trajectory, especially if we can achieve the aim of getting our ranking in the Ease of Doing Business down to 50 from the current 82.

In that respect the ratings agencies and everybody else will be watching closely as to how the government manages the Eskom reconfiguration, as that will be top of mind for the next few months.

Once Eskom achieves an Energy Availability Factor near 80%, then the focus will shift to the regulatory reforms needed to make it easier to do business.

That is why it makes sense to end with a score card of reforms that are intended to be implemented shortly or like the Mining Charter have already been put in place.

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *