Options to get public finances on track

2014-10-26 15:00

Eight short months after his predecessor Pravin Gordhan tabled a budget based on economic growth of 2.7% this year, Finance Minister Nhlanhla Nene’s revision down to 1.4% shows the extent of the escalation in the financial problems facing South Africa.

“The Treasury projects’ growth will reach 3% in 2017,” he said during his medium-term budget policy statement on Wednesday.

This is just 0.3 percentage points above Gordhan’s estimate for this year, and 2 percentage points off the 5% average the National Development Plan says is needed to get rid of poverty by 2030.

Global factors have played a role in the slowdown, but Nene said domestic factors such as energy constraints, strikes and skills shortages also took a toll on growth.

“As a result of slow growth, tax revenue is below our budget projection. Government’s debt continues to rise as a percentage of GDP.”

Tax revenue for 2012/13, estimated at R1.01?trillion in February, has come in at R886.1?billion. The debt burden is growing – debt servicing costs are expected to grow faster than the budget as a whole at 9.3% over the next three years, costing government R415.6 billion as gross debt reaches R2.4 trillion by 2018.

These are the options Nene is exploring to bring public finances back on track.

1. Raising taxes

Proposals will be introduced in the 2015 Budget to generate additional revenue of at least R27?billion over the next two years.

2. Cutting costs

Government will lower its 2014 budget expenditure ceiling by R25 billion over the next two years. This includes keeping budgets of non-essential goods and services at current year levels, withdrawing funding for posts which have been vacant for too long, and reducing grants to provincial and local governments with patterns of under-expenditure.

3. Freezing posts

The government head count will be frozen for the next two years – any increases will have to be funded from existing budgets. Treasury, with two other departments, will conduct a review in the next year to look into permanently withdrawing vacancies which are currently budgeted for. Resignations will create space for new appointments and exceptions will only be considered for critical positions.

4. Recapitalising

Recapitalising state-owned entities without impacting the budget deficit.

In the next two years, recapitalisation of state-owned companies will only happen in a way that does not affect the budget deficit, estimated to narrow to 2.5% from the current 3.9% by 2018.

Other than selling non-strategic state assets to support state-owned companies, government will also explore private investment. Funding will only be allocated once the state-owned companies deliver sound business plans and greater efficiencies.

5. Preparing earlier

Treasury has “restrained” indicative allocations for the third year of the mini-budget, leaving substantial unallocated resources. These will be used to build a buffer for economic and fiscal shocks for the coming years, while a significant amount may also be considered for high-impact programmes.

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