Economic growth forecasts have been cut. State debt will rise. And tax revenue is down.
But if the government doesn’t bail Eskom out, its crash would have a disastrous effect on the economy.
It could lead to a negative market reaction that would prompt capital outflows, with greater pressure on the rand. It would also perpetuate weak investor confidence and reduce economic growth.
When Finance Minister Tito Mboweni delivered his maiden budget speech on Wednesday afternoon he said that the planned R69-billion bailout for Eskom will increase state debt and debt-servicing costs.
But this is only one of his problems to solve in what has been described by economists as one of the most difficult budgets in the country’s post-apartheid history.
The finance minister announced that the consolidated budget deficit was projected to narrow from 4.5% of GDP for the 2020 fiscal year to 4% by the 2022 fiscal year.
In another worrying sign, debt owed to municipalities is increasing. At the end of March, debt owed to municipalities is forecast to climb to almost R159 billion from almost R99 billion at the end of March 2015.
Of debts owed by municipalities that are more than 90 days in arrears, Eskom is the major creditor with R12.8 billion owed followed by water boards with R6.4 billion owed.
“From July 2018 to June 2019 municipal financial year, 113 municipal councils adopted unfunded budgets, up from 83 the prior year.”
The government is expecting to issue $2 billion in debt by the end of the 2019 fiscal year.
“Over the next three years, government will raise an additional $8 billion in global capital markets.”
Mboweni cut the National Treasury’s forecast for economic growth for this year from 1.7% to 1.5% due to “fragile recovery in employment and investment, and a less supportive global trade environment”.
“There are pronounced risks to the economic outlook. The main risks concern Eskom. Failure to fully implement the reconfiguration of Eskom could lead to a negative market reaction that would prompt capital outflows, with greater pressure on the rand. It would also perpetuate weak investor confidence and reduce economic growth,” the report said.
In the worst-case scenario, National Treasury is forecasting negative 1% growth this year while its best case scenario is just more than 2% growth.
By 2021, the National Treasury’s best-case scenario is growth of 3% and its worst-case scenario is 1%.
“The economic and revenue outlook has deteriorated since the October 2018 medium-term budget policy statement and funding pressures from state-owned companies have increased,” the medium-term budget policy statement said.
The report indicated that government tax revenue for the 2019 fiscal year would come in R43 billion under the target set at the 2018 budget speech.
“This year’s budget underlines the National Treasury’s continued commitment to these requirements in 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,” the review report said.
“Weak economic performance and residual problems in tax administration have resulted in large revenue shortfalls,” the report said.
The deteriorating financial position of state-owned companies has put additional pressure on the public finances.
“Government’s efforts to reform state-owned companies and the launch of the infrastructure fund are expected to increase growth and investment in the year ahead,” the 2019 budget review report said.
For the 2020 fiscal year, consolidated government expenditure is forecast to R1.83 trillion.
The major categories of expenditure are forecast to be:
- R386.4 billion on education and training;
- R278.4 billion on social grants and provincial social development;
- R222.6 billion on health;
- R209.2 billion on economic development;
- R208.5 billion on community development;
- R202.2 billion on debt service costs; and
- R65.3 billion on general public expenditure.
The report says that over the next three years, general government infrastructure investment plans amount to R526 billion.
On the inflation front, the report forecasts that consumer price inflation will average 5.2% in 2019, up from 4.7% in 2018 in response to rising food prices.
In a worrying development, the report said that local investment fell 0.3% year-on-year in the first three quarters of 2018, following a 0.7% expansion in the same period in 2017.
“As a percentage of GDP, investment has persistently declined, reaching a 13-year low of 17.7% in the third quarter of 2018. The combinations of low growth in employment, investment and productivity continues to restrain economic growth,” the report said.
“Investment growth in projected to rise from 1.5% in 2019 to 3% in 2021 as confidence gradually increases, worn-out capital is replaced and the state improves its ability to execute capital projects,” the report said.
However, concerns about electricity supply and slower global growth pose risks to the near-term outlook.
Turning to the South African Revenue Service, the report said that Mboweni would introduce legislative amendments to implement the recommendations of the Sars Commission and to strengthen tax administration and capacity at Sars.
The report attributed the 2019 fiscal year tax revenue shortfall to “administrative weaknesses in collection were a contributing factor”.
“Sars is reestablishing a division that will focus on large business. This process, which includes the recruitment of specialists, is expected to be completed by April 2019.”
Sars had reduced its VAT credit book from R41.8 billion in September last year to R31 billion at the end of January.