Mboweni’s Moment of Truth
Commentary: 25 October
In his maiden speech as Finance Minister, Tito Mboweni was calm, composed and even a little jovial. This was the first time that the new administration could distinguish itself in fiscal terms from the old guard. Mboweni was at pains to stress that the economy finds itself in a tight spot – growing risks include mounting trade tensions, tightening financial conditions and an economy that is just starting to recover from its surprise recession.
There are encouraging signs that the biggest failings of the Zuma presidency are being addressed, at least at the conceptual level. Towards this end, the finance minister made several comments which were widely welcomed by the market:
· The government’s intention to partner with the private sector to increase investment in infrastructure
· A pubic sector wage bill which must be prudently managed (it currently consumes 35% of resources)
· A strengthening of leadership at SARS
· The reduction of data costs and an improvement in the quality of data
· Reiterating the independence of the Reserve Bank
· A greater sense of urgency is detected in delivering critical projects e.g. fixing failing municipal sewerage infrastructure at the Vaal and addressing the corruption-ridden Giyani water project
· The need for greater oversight at provincial and local governments as well as at SOEs
· Continued efforts to stabilise the debt-to-GDP ratio, (which is nevertheless still expected to stabilise uncomfortably close to 60% by 2023/24)
Despite the welcome talk, there were some shocks and unpleasant surprises:
· Treasury has been forced to halve its growth forecasts over the medium term – GDP is now expected to reach 0.7% this year, rising gradually to 1.7% in 2019 and 2.1% by 2020.
· The budget deficit is expected to overshoot by 0.4% to 4.0% in 2018/19, largely reflective of the revenue shortfalls on the back of a lower growth outlook and higher debt servicing costs.
· The revenue shortfall of R27bn is larger than expected and is attributed mainly to upward revisions in VAT refunds and lower collections of company and personal income tax.
Expenditure is being reprioritised rather than expanded. Over the medium term, government will spend R5.9 trillion. Spending priorities will include education, health and social development. SAA, the Post Office and SA Express will receive R9.2bn in the current financial year and R14.7bn has been set aside to upgrade informal settlements. Funds from underspending and underperforming programmes, amounting to R32.4bn, have been re-allocated to the president’s stimulus package over the medium term. Specifically, R15.9bn has been allocated to infrastructure, clothing and textiles and the Expanded Public Works Programme.
National Treasury’s immediate priority, that is to stave off a potential rating downgrade, has most likely been achieved. But over the longer-term, Treasury will need to facilitate a return to growth of at least 2.5% in order to compensate for the growing debt burden. Better GDP growth will also allow it to reap the benefits of higher tax collection. However, the fiscal space is narrowing. The wilful corruption and incompetence of the previous administration will take considerable time and effort to reverse.
By Bridget Kelly, Santam
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