‘Nene walks tightrope on medium-term budget’

2014-10-21 18:14

Finance Minister Nhlanhla Nene has little room to manoeuvre in his maiden mid-term budget speech and may have to get tough on state-owned entities and civil servants in a way that will earn him little political popularity, observers predicted.

Economists Annabel Bishop and Mike Schussler agreed that Nene would have to keep a tight rein on spending, given lower revenue intake and warnings of further credit down-ratings.

Schussler said this would mean the minister getting stricter still with parastatals and making good on his predecessor Pravin Gordhan’s warning to state employees to prepare for an end to salary increases above the inflation rate.

“It is going to be difficult in the political climate that is still leaning to the left but he is going to have to say we need to control our costs. It is difficult when it is your first MTBP statement,” added Schussler.

But he cautioned that the continual cost of bailing out stricken state-owned entities, notably South African Airways, was untenable and said they should expect “some hard words” from the Treasury chief.

In the poor growth and revenue climate, said Schussler, Nene could be expected to sell off state assets where he could without steering into the politically troubled waters of privatisation.

He predicted that Nene would go ahead with selling the state’s Vodacom stake, and cut grants to areas such as basic education.

The much-trumpeted infrastructure drive would not be immune either, he said, since existing projects such as Eskom’s two new coal plants had gone way over time and budget, leaving less funding for other components of the plan.

Schussler, like Investec chief economist Bishop, predicted Nene would cut National Treasury’s February forecast of year-on-year GDP growth of 2.7% to around 1.5%, and said he believed that Nene would also be compelled to adjust the growth forecast for next year downwards.

Bishop said Nene had to exercise caution against direct debt rising as Moody’s rating agency had warned South Africa risked a further downgrade if there was any sign of unsustainability.

“Should the Medium Term Budget Policy Statement deliver higher net debt ratio projections, or fiscal slippage with the fiscal deficit projected to reach 3.0% of GDP after 2016/17, then SA could receive a further credit rating downgrade, which would then cause the rand to weaken closer to our down case.”

But Bishop said communication from Treasury ahead of tomorrow’s medium-term budget had signalled a commitment to fiscal efforts to avoid this scenario.

She said as the 2014/15 financial year reached its halfway mark, government spending was slightly higher than budgeted compared to 2013/14, and revenue collection somewhat lower.

Nene could therefore give pointers to potential tax changes to be implemented come the main budget in February, though income tax changes would cost the government political points.

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