Nhlanhla Nene, SA Minister of Finance delivered his mid-term budget yesterday with hard measures including job freezes, budget cuts and tax increases to address low economic growth.
The sale of nonstrategic state assets as well as a new funding model for state-owned enterprises (SOEs) returned to the agenda for the first time in many years.
Announcing the policy shift in the medium-term budget policy statement tabled in Parliament, Nene said it was “a road map to safeguard the public finances”. Two years of fiscal consolidation were needed to put public finances on a more sustainable footing, he said.
“Today we face a difficult economic environment. We have reached a turning point. Fiscal consolidation can no longer be postponed,” he said in his speech in the National Assembly.
The minister’s bold and disciplined approach was greeted favourably by the bond market, with the benchmark R186 strengthening by 15 basis points on the day. Lower-than-expected inflation figures contributed significantly.
While the budget policy statement is the most austere since the structural adjustments of the late 1990s, Mr Nene said its proposals could not be characterised as “austerity”. Although government spending grows more slowly than the 1.8% expected in February, it still grows at 1.3% in real terms over the next two years.
Economists welcomed the fact that cutbacks were no longer just being talked about as in the past but were embodied in the numbers. They warned of downside risks to the projections but believed the policy statement would ward off a sovereign rating downgrade in the short term.
Rand Merchant Bank fixed-income strategist Carmen Nel said it was “very encouraging” that Mr Nene was adopting a more conservative stance and taking the risk of a credit rating downgrade seriously. “The numbers reveal a greater willingness to curtail expenditure,” she said. “Certainly the financial markets will view it as favourable.”
Standard Chartered Bank’s head of Africa research, Razia Khan, said there were positive surprises in the policy statement relative to the expectation that fiscal consolidation would be delayed and spending and debt would increase significantly. Instead, the budget deficit would narrow a lot faster than expected.
“Perhaps most significant of all, expectations of severe fiscal deterioration due to the state’s support of Eskom proved to be unfounded,” Ms Khan said.
The government’s plan to cut back on expenditure growth and its new tax measures — to be announced in the budget in February — are expected to generate R52bn over the next two years.
National government personnel budgets will be frozen, funding of vacancies reviewed, and the spending on nonessential goods and services such as travel, accommodation, entertainment and consultants slashed, saving about R1.3bn in the next two years.
The government is emphatic, however, that service delivery on education, health and social protection will not suffer and that its infrastructure investment drive will remain fully on track.
These measures will allow the government to meet its budget deficit targets set in February and stabilise government debt, which the Treasury says is fast approaching unsustainable levels. But several risks remain, such as slow economic growth, the public sector wage bill and the worsening finances of state-owned companies.