Medium Term Budget - no money for new things

According to reports, in light of the Medium Term Budget Policy Statement (MTBPS) released yesterday, South Africa may experience a further credit-rating downgrade by international credit-rating agencies.
 
Peter Attard Montalto, research analyst at Nomura noted: “The National Treasury revised down growth estimates substantially for the current and next calendar years but remained elevated versus the SARB (South African Reserve Bank) for 2017 and beyond. Treasury now stands at 1.5% for this year and 1.7% for next year, down from 2.0% and 2.4% previously.”
 
The presentation of the MTBPS was delayed as the Economic Freedom Fighters (EFF) requested that the presentation of the budget be postponed until additional funding for higher education could be provided. The EFF was eventually escorted out of parliament while chanting ‘”fees must fall.”
 
While this scene played out in parliament, on the street outside the parliamentary building in Cape Town, students from the #FeesMustFall campaign protested.
 
No money for new things
 
Montalto revealed that “there was no new policy to support growth.” He believed that there is an apparent lack of new policy to help sustain the country’s economy. Minister of Finance Nhlanhla Nene pointed out in his speech that “it is apparent that slower growth and volatility will remain features of the world economy for some time to come.”
 
However, Nene believed that the government and Treasury have structures in place to overcome the issues supressing South Africa’s growth.
 
“In the framework set out in the 2015 Medium Term Budget Policy Statement, Government has adapted to this turbulent environment, through measures to maintain the health of the public finances and support the social and economic transformation South Africa needs,” said Nene.
 
According to Montalto, the essence of what Nene presented in the budget speech was that there is no money for government to  “do new things,” while re-allocating funds and adjusting the budget to lower revenue growth.
 
Nene highlighted: “Without stronger economic growth, the revenue trend will remain muted. If revenue does not grow, expenditure increases cannot be sustained.”
 
Tax hikes
 
One of the suggested ways that Treasury has noted for increasing revenue is tax hikes. However, this has not been confirmed or finalised.
 
Nene explained that over the medium term, Treasury is exploring “reforms that promote an efficient and progressive tax system.” He added that Treasury is currently considering several of the recommendations made by the Davis Tax Committee. These include:
·         Profit shifting and the misuse of transfer pricing,
·         Mining taxation,
·         Small business taxation,
·         VAT and the estate duty.
 
Montalto noted: “This still seems impossible for us to contemplate pre-local elections in the 2016 Budget (except the margins with excise taxes, margin creep, maybe a little extra tax on the rich); certainly major VAT hikes are impossible. Yet National Treasury was clear that they see VAT hikes as an important option on the table for the future (when it can be presented as a grand bargain along with NHI implementation).”
 
Expenditure
 
The minister highlighted in his speech that the cost containment measures that Treasury put in place to reduce expenditure on consultants, travel and subsistence, entertainment, catering and events have been successful with a reduction in spending.
 
“Across all national and provincial departments, in the first year, a three percent decrease was achieved in spending on consultants, a six percent decrease in travel and subsistence and a 47 percent decrease in catering, entertainment and events expenditure.
 
“Preliminary budget data indicate that there will be further reductions in these categories of spending over the MTEF period, contributing both to value for money and improved public service delivery,” stated Nene.
 
He added: “We recognise that there is not yet full compliance with these measures. The Treasury is currently revising the Cost Containment Instruction to review thresholds and clarify its implementation, especially on expenditure related to conferences.”
 
However, while he reported on these reductions, he highlighted that government spending will increase over the medium term by 7.2%.
 
Looking ahead
 
According to Montalto, the budget presented by the finance minister is credible, but does not cover all issues.
 
“There is simply no wiggle room left of the future. Difficult choices are needed—ones that probably cannot be made at the budget in February with the local elections ahead. Treasury will be praying, hoping, that they do not have to revise growth numbers down again (the growth credibility hurdle will be all the more important and difficult then), especially if the downside risks we have talked about look to be materialising at that time. They won’t have contingency reserves to fall back on,” said Montalto.
 
The message of no money to spend on new projects or developments does little to quell the anger of the students. The minster’s budget does little to address the wants of the students, however, with protests only commencing last week, the minister had little time to adjust his budget to meet the students’ demands.
 
For more information on what the budget said about higher education, click here.
For more information on the student protests, click here.