2019 Budget: Minister of Finance briefing

Meeting report

Briefing by the Minister of Finance
Mr Tito Mboweni, Minister of Finance, in his opening remarks, emphasised the need for the public to understand that there is no endless supply of cash in government. The biggest risk to the fiscus were state-owned enterprises (SOEs) and the public sector wage bill. With SA facing low economic growth, demands for social needs and public services far outweigh government's revenue. The low economic growth informs revenue collection projections, and demands for expenditure far outweigh revenue. What was surprising was that no matter how many times one explains the constraints that the country faces on the income side, the demands on the expenditure side do not moderate. The population is growing, putting increasing pressure on expenditure items such as hospitals and schools, at a time when the economy is not growing.

Minister Mboweni pointed out that if SOEs like Eskom, Denel, South African Airways (SAA) and the South African Broadcasting Corporation (SABC) want more money, government will appoint a 'chief reconfiguration officer' in the same way a curator is appointed for a bank which is in trouble. Government will be strict because it would want resources to be properly looked after. On Eskom, government wants to see concrete measures as it undergoes an unbundling into three separate entities encompassing generation, transmission and distribution. In the process, more competition would probably be seen in the generation side which would benefit consumers. The upward trajectory of the debt-to-GDP ratio, which is set to reach 60.2% in 2023/2024 and 60.1% the following year, is an issue of concern. He warned that this trend will lead commentators to talk of the dangers of a debt trap and lead people to think that SA cannot manage its finances and that it might need assistance. The debt-to-GDP ratio should be managed down to below 40%.

National Treasury presentation
Mr Dondo Mogajane, Director-General, National Treasury, said the 2019 Budget outlines a series of economic and fiscal measures intended to move the economy on to a new trajectory and reduce the long-term risks to South Africa’s public finances. Government’s central economic policy goal is to accelerate inclusive growth and create jobs. Its main fiscal objective is to ensure sustainable finances by containing the budget deficit and stabilising public debt. The Budget proposals support these goals. It confronts a difficult environment in which economic growth remains weak, public debt and debt-service costs have accelerated, and governance and operational concerns are manifest across the public sector. Weak economic performance and residual problems in tax administration have resulted in large revenue shortfalls. The deteriorating financial position of state-owned companies has put additional pressure on the public finances. In light of these considerations, the 2019 Budget priorities are to: narrow the budget deficit and stabilise the national debt-to-GDP ratio; support restructuring of the electricity sector, and reduce the immediate risks Eskom poses to the economy and the public finances; and renew economic growth by strengthening private-sector investment, improving the planning and implementation of infrastructure projects, and rebuilding state institutions. The risks to the fiscal and economic outlook remain elevated and were as follows: SOEs reform process; domestic economic outlook, including load-shedding, higher electricity prices, prolonged industrial action in mining, and adverse weather conditions; international economic outlook, including slower growth in China, trade frictions, the terms of Brexit, and potential banking sector risks in Europe; and tax buoyancy and SARS reorganisation process.

GDP outlook had been revised down since the 2018 Medium Term Budget Policy Statement (MTBPS). Real GDP growth estimated at 1.5 % in 2019, was down from 1.7 % in the 2018 MTBPS, reflecting weak employment and investment growth. CPI inflation was projected at 5.2 % in 2019 in response to rising food inflation and electricity prices. CPI inflation projections for 2020 and 2021 remain unchanged from 2018 MTBPS estimates. On the financial position of SOEs, several entities are struggling to meet their debt obligations, with return on equity deteriorating to-0.3 % in 2017/18. This reflects weak revenue growth and high cost structures. Growing debt-service costs from a decade-long debt accumulation phase also weigh heavily on profitability. Over the year ahead, government will initiate reforms to strengthen the governance, financial management and operations of state-owned companies. Progress has been made on growth-enhancing reforms, including preparations to allocate telecommunications spectrum, reform visa requirements and remove barriers to mining investment. Spending has been reprioritised to support black commercial farmers, revitalise townships and industrial parks, and rebuild the South African Revenue Service. Funding has been provided to address urgent matters in health and education, including filling critical medical posts and completing school sanitation projects. A series of reforms are underway to improve the quality and quantity of public infrastructure projects. Government is reforming state-owned companies, with Eskom as its immediate focus. The environment remains challenging. The medium-term economic outlook has been revised down, with GDP growth forecast to reach 1.5 % in 2019, rising to 2.1 % in 2021. Weak economic performance and residual problems in tax administration have resulted in large revenue shortfalls. The deteriorating financial position of state-owned companies has put additional pressure on the public finances.

Restructuring the electricity sector
Government’s immediate focus is to address the substantial risks that Eskom poses to the economy and the public finances. In its current form, Eskom is not financially sustainable, nor can it meet the country’s electricity needs. Establishing a more competitive electricity sector will improve business and consumer confidence, encourage private investment and reduce upward pressure on prices. The depth of the financial crisis at Eskom requires government to support the utility’s balance sheet, with amounts of R23 billion per year provisionally allocated over the medium-term. The financial support package, with strict conditions attached, will enable Eskom to service its debts and meet redemption requirements, and secure the necessary liquidity to undertake urgent maintenance to restore stable electricity supply. Further steps in restructuring the electricity market will be announced in the months ahead.
Managing the public-service wage bill
Employee numbers are declining at a rate sufficient to absorb 2018 wage agreement pressures, owing to natural attrition. New employees tend to be younger and lower ranked than employees who are leaving. Over the medium-term, government will take additional steps to manage growth in compensation, including early retirement without penalties. Proposed reductions to compensation budgets amount to R5.3 billion in 2019/20, R11 billion in 2020/21, and R10.7 billion in 2021.

Mr Mogajane added the 2019 Budget prioritises narrowing the budget deficit and stabilising the national debt-to-GDP ratio, restructuring the electricity sector and reduce the immediate risks Eskom poses to the economy and the public finances and renewing economic growth and rebuilding state institutions. The 2019 Budget proposes large-scale expenditure reprioritisation and tax measures that narrow the deficit over the medium term and stabilise gross national debt at 60.2 % of GDP in 2023/24. While progress is being made on various short-term initiatives, South Africa needs to implement a range of structural reforms that will bolster confidence, investment and economic growth.

Discussion
Mr M Chabangu (EFF) asked what unbundling, restructuring or reconfiguration of SOEs, as presented by the President at SONA and the Minister during his Budget speech, meant. There was need for a clear understanding on this. It was expected that the Budget would elaborate on this after the announcement by the President. On voluntary retirements to manage the public service wage bill, what were the plans to ensure that capacity of public institutions is not compromised? Having senior people with institutional memory leave might compromise service delivery.

Mr N Gcwabaza (ANC) asked if there were serious efforts to unravel the bad business practises and deep-rooted challenges within Eskom. Such efforts would include the review of evergreen contracts and the purchase price of coal by government among others. Further, illicit financial flows needed to be dealt with decisively to spruce up government revenue.

Mr A Shaik-Emam (NFP) commented on the impact of illicit trade and financial flows to the SA economy. Millions of rand left the country each and every day without recourse. There was a need for a holistic approach to deal with the challenges bedevilling the country. There was talk of wanting to sell off SOEs because they were not making profits. However, the expectation was that anybody who would buy these entities would want to make money out of them. Therefore, why is it that the State was not able to turn profits out of these entities? The interference and influence of politicians in these SOEs was an impediment to progress, and was to blame for the mismanagement.

Ms G Ngwenya (DA) expressed concern that the language in the Budget statement did not match with the presented numbers. She felt there was some massaging of the numbers in the statement. How would the mooted measures bring the economy back to a meaningful growth trajectory? Was the output gap or potential GDP expected to close? On private investment and trade, the European Union- one of SA’s largest trading partners, in its 2017 business survey, highlighted Black Economic Empowerment as an obstacle to doing business in SA. What was Treasury’s opinion on this?

Mr A Lees (DA) commented on Eskom. Where will the R23 billion allocation come from? Given the unbundling was likely to go ahead despite opposition, which unit among the three was going to take up the existing debt? Were there discussions taking place with the Public Investment Corporation (PIC) on loans extended to Eskom? He called for some reassurance from the Minister that the assistance to be extended to Eskom was sufficient to ensure it continues trading without any reason for further requests down the line. On the proposals to manage the public wage bill, when exactly would the early retirement window open for public servants to make these choices?

Mr R Chance (DA) noted small businesses were allocated 2% of the Budget and yet were expected to contribute 80% of jobs created, according to the National Development Plan (NDP). Was Treasury satisfied with the extent to which small business development was being priorities in SA? Calls for additional funds by the Department of Small Business Development have always gone unheeded. On the billion rand allocation to the innovation fund through the Small Enterprise Development Agency (SEDA), why would an additional allocation be extended to an organisation with an impaired loan book?

Prof B Bozzoli (DA) asked about the R111 billion allocation to higher education. Was this new money or would it cover the actual cost of higher education? If it was the latter then it is too little; if the former then it raises questions about its sustainability, especially given half of the students do not complete their courses. Did the Minister believe the higher education system that was introduced by former President Zuma as his swansong was sustainable? Many believed it might not work in the long term. Were income contingent loans being considered as an option for funding higher education?

Mr M Shackleton (DA) asked whether the economic picture obtaining at the moment was sustainable. Also, how will the allocation to infrastructural development affect municipalities that have never had running water? Why was the South African Revenue Service’s (SARS) large business unit shut down? He noted the child support grant was still below the poverty line. Were there plans to bring it above the poverty line?

Ms S Shope-Sithole (ANC) noted that SA, as a small economy, is affected by developments in developed economies. Was SA positioning itself on the backdrop of uncertainties in Europe, particularly with regards to Brexit?

Mr F Essack (DA, Mpumalanga) asked how the proposed fiscal sustainability measures might affect service delivery. There was need to balance fiscal sustainability and State’s capacity to deliver services. 

Mr Carrim said Members were excruciatingly aware of the parlous state of the economy and the need to address this as a matter of urgency. He made reference to a presidential commission that looked into reforms in SOEs. Had alternatives such as public-private partnerships, without resorting to privatisation, been considered?

Ms Tobias noted that the Employment Tax Incentive programme was going to be spruced up. The Parliamentary Budget Office had raised pertinent views on the need to ensure that the management of this programme is improved. This should be looked into and its success thus far be measured.

Ms Phosa noted the R481 million allocation to SEDA for the incubator programme expansion. Was this for the MTEF period or for 2019/20? What were the plans to boost the township economy? Could it be that it was included in the SEDA allocation? On the configuration of SOEs, not much had been said about others besides Eskom.

Minister Mboweni, in response, identified the need for clear, targeted and better managed funding models for the small business sector. On the management of the public service wage bill, salary freezes were equally applicable to cabinet ministers and everyone earning R1.5 million and above per annum. Belts had to be tightened on account of the economic challenges. On SOEs such as SAA, it was difficult to privatise these due to structural problems. SAA has got so much debt and was not functioning optimally thus it would be difficult to find an equity partner. On Eskom, the proposal was to divide it into three parts: generation, transmission and distribution. The generation division would compete with other private-owned power generators. Treasury would get a better sense of Eskom’s cost structure once the reconfiguration is achieved. Eskom needed assistance now. Treasury was moving from the premise that it could not wait for the restructuring to happen. Whenever

Mr Mogajane added that if Treasury had to strip out financial support for Eskom, then SA's fiscal consolidation path would bear fruit. Without Eskom, the country’s fiscal consolidation would be credible. On the public service wage bill, Treasury has been in discussions with the Department of Public Service and Administration about meaningful interventions. Government has targeted between 16 000 to 30 000 employees over the next three years to take early retirement without incurring penalties in order to shrink the State's wage bill. There is a lot of uncertainty about the long term outlook at Eskom. Treasury was to make a decision about what is to be said about Eskom as a major risk to growth and public finances. The severity was seen in the past few weeks with the load shedding. There were severe liquidity pressures and it is clear Eskom would need balance sheet support going forward. However, a lot had to be worked out both on the operation and reform side. Eskom would require support in the next few years and this was the most transparent way to signal government’s support to the entity. The challenge had to be confronted in order to keep the lights on. He agreed the growth forecasts had been revised downwards relative to the MTBPS estimates. Independent researchers and institutions had revised their forecasts as well. The allocation to small business development was largely towards innovation and the model of disbursement would be on a wholesale funder basis.

A National Treasury official, on higher education funding, said the R105 million allocation was meant to fund student accommodation in the various TVET colleges. Treasury has been working with task team members to determine the sustainability of the allocations to higher education and the sustainability of the various proposed models. 

Mr Mark Kingon, Acting SARS Commissioner, said there were a number of interventions underway to curb illicit trade, some of which were detailed in the Budget Statement document. The shutting down of the large business unit was dealt with extensively by the commission of inquiry chaired by Judge Nugent. SARS was taking action to spruce up its revenue collection capacity. Tax compliance needed to be strengthened as SARS could not sit with a debt book of R150 billion as was currently the case. Also, SARS was making efforts to ensure all refund backlogs are cleared.

Ms Phosa asked Members with additional questions to furnish them to Treasury in writing as discussions could not go further owing to time constraints. She thanked everyone for their inputs.
 
The meeting was adjourned.