2018 Mid-Term Budget key highlights

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Finance Minister Tito Mboweni expects the economy to grow 0.7% in 2018, compared with the 1.5% prediction that was presented by former finance minister Malusi Gigaba in February. Finance Minister Tito Mboweni expects the economy to grow 0.7% in 2018, compared with the 1.5% prediction that was presented by former finance minister Malusi Gigaba in February.

CAPE TOWN - Newly-appointed Finance Minister Tito Mboweni on Wednesday delivered the 2018 mid-term budget statement pledging to fix the South African Revenue Collection Service as a matter of urgency.

Minister Mboweni’s first major policy statement since returning to the cabinet almost halved the Treasury’s growth forecast, while predicting a steady increase in debt and borrowing that may attract unwelcome interest from ratings agencies.

The immediate market reaction was negative, pushing the rand down as much as 1.46% to R14.46 to the dollar, while the yield, which moves inversely to the price, on the government bond maturing in 2026 increased eight basis points, to 9.14%. The increase in bond yields reflects the reality of higher supply in coming years as the government grapples with debt levels that will peak later than it had anticipated and at higher levels.

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In an echo of President Cyril Ramaphosa earlier in 2018, Mboweni also tried to strike an optimistic tone, even as he acknowledged the grim economic reality, saying the statement was “built on a strong conviction that SA can be renewed”.

He stood his ground on fiscal discipline, maintaining the expenditure ceiling and providing no extra funding for unbudgeted public sector wage increases.

In a revision that puts the government in line with the Reserve Bank’s forecast, the state now expects the economy to grow 0.7% in 2018, compared with the 1.5% prediction that was presented by former finance minister Malusi Gigaba in February.

Ramaphosa’s widely optimistic 3% for the current year will not materialise anytime soon, with GDP growth expected to reach 2.3% in 2021.

This is also far from the 5.4% growth that the government’s National Development Plan says is needed to reduce an unemployment rate of just more than 27%.

A rate that Mboweni, who replaced Nhlanhla Nene just two weeks ago, described in the foreword to the medium-term budget policy statement (MTBPS) as “alarmingly high”.

The weak economy, tax revenue shortfalls and the depreciation of the rand are forecast to play havoc with the nation’s finances, with the budget deficit set to jump to 4% in the current fiscal year, up from a 3.6% projection in January. It will then rise to 4.2%, before narrowing slightly back to 4% in 2022. That means overall debt as a percentage of GDP will continue rising, reaching 59% at the end of 2022, from 50.7% in 2016-2017.

2018 Mid-Term Budget key highlights

• The consolidated budget deficit narrows from 4.2% in 2019/20 to 4% in 2021/22.

• Gross debt is expected to stabilise at 59.6% of GDP in 2023/24.

• GDP growth revised downwards to 0.7 from 1.5% in 2018 following a recession in the first half of the year.

• GDP growth is expected to recover gradually to 2.3% by 2021

• Global economy expected to continue growing at 3.7%

• Tax revenue has been revised down by R27.4 billion in 2018/19, R24.7 billion in 2019/20 and R33 billion in 2020/21 relative to the 2018 Budget. This mainly reflects higher-than-expected VAT refunds.

• In 2017/18, for the first time since the 2008 global financial crisis, tax revenue growth did not exceed GDP growth.

• The cost of servicing government debt is expected to exceed 2018 Budget estimates by R1 billion in 2018/19, R4.9 billion in 2019/20 and R7.9 billion in 2020/21. This reflects a larger main budget deficit, currency depreciation and higher interest rates. An estimated 15.1 per cent of main budget revenue will be used to service debt in 2021/22 compared with 13.9 per cent in 2018/19.

• Main budget revenue is projected to increase from 25.7% of GDP in 2018/19 to 26% of GDP in 2021/22. Main budget expenditure is estimated to remain stable at 30.2% of GDP over the medium term

Where the money will go

• The Medium-term expenditure framework commits public resources of R5.9trn over the next three years. Of this amount:

– R3.3trn or 56.2% t will be allocated to education, health, the provision of water and electricity services, and social grants.

• Government is proposing reprioritisation of R32.4bn over the next three years. Of this amount:

– R15.9bn goes towards faster-spending infrastructure programmes.

– R16.5bn will be allocated to various programmes, including recapitalising the South African Revenue Service (SARS), a minimum wage for community health workers, critical posts and goods and services in health, and streamlining the management of the justice system.

– In addition, changes to grant structures amounting to R14.7 billion will promote upgrading of informal settlements in partnership with communities.

– Housing subsidies amounting to R1 billion will be centralised to better support middle- and lower-income home buyers.

• In the current year, R1.7 billion is added to infrastructure spending (including funding for fast-spending school building programmes)

• R3.4 billion is allocated to drought relief, mostly to upgrade water infrastructure aside funding for this purpose.

• R3.4 billion is allocated in 2018/19 to provide water, improve infrastructure and offset the economic costs of drought. Funding is also provided for the South African Isotope Facility at iThemba Labs and, following approval through the Budget Facility for Infrastructure, for the MyCiti Phase 2A bus programme in the City of Cape Town.

• R800 million added to the school infrastructure backlogs grant to complete approved projects.

• R3.4 billion is allocated to the education infrastructure grant. Funds are also allocated to the same grant to continue repairing infrastructure damaged by storms and floods in KwaZulu-Natal in 2017.

• The Department of Women has developed a framework to provide free sanitary towels to learners from low-income households. The project rollout is funded through the provincial equitable share.

• Local government equitable share, which finances free basic services to low-income households and some administrative costs for municipalities, is expected to grow by9.4 per cent per year to R82.2 billion by 2021/22.

• Over the medium term, public transport expenditure is expected to increase to R101.1 billion as integrated public transport networks are built and operated in 13 cities.

State owned entities

• South African Airways will receive R5 billion through a special appropriation bill to settle debt redeeming between now and March 2019. This will help to prevent a call on the airline’s outstanding debt of R16.4 billion, which is guaranteed

• R1.2 billion is allocated to South African Express Airways.

• The South African Post Office receives R2.9 billion to reduce debt levels

National Health Insurance

• R166 million added to the national health insurance (NHI) indirect grant (health facility revitalisation) component to procure medical equipment and to design a new academic hospital in Limpopo.

• R546 million reprioritised within the NHI indirect grant to address the critical shortage of medical professionals in the health sector, and to procure beds and linen for health facilities.

Tax changes

• In 2019 annual adjustments to personal income tax brackets, levies and excise duties in line with inflation are expected.

• White bread flour, cake flour and sanitary pads will be zero-rated from 1 April 2019.

Students

• The Department of Higher Education and Training is developing a funding framework to clarify students’ food, book, transport and accommodation allowances, and the obligations required of bursary students during and after their studies.

• Funds recommended through the Budget Facility for Infrastructure, and from educational institutions and the department, will support the Student Housing Infrastructure Programme. Over the next 10 years, it will provide 300 000 new beds at universities, and technical and vocational colleges.

• Over the medium term, an estimated R61.5 billion in revenue from the skills development levy will continue to expand participation in learnerships, internships and skills development programmes.

Land reform

• Government is working with the Land Bank to accelerate land reform and maintain the productive use of transferred land.

• Under the Land Reform Programme, government will provide 30-year leases, enabling the Land Bank to extend loans to emerging farmers.

• The Land Bank will use a combination of loans and grants to increase production through the Black Producers Commercialisation Programme. Funding from the comprehensive agricultural support programme grant will be reprioritised to produce foot-and-mouth disease vaccines.

Read more on:

Medium Term Budget Policy Statement  |  Malusi Gigaba  |  Tito Mboweni  |  Cyril Ramaphosa  |  Nhlanhla Nene
IHS Conference Nedbank 2018

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