Beyond the riot chaos, What does the medium-term budget tells us about the state of SA’s Economy?

Posted On Tuesday, 27 October 2015 20:16 Published by
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High state spending, slowing economy, and a marked increase in longer term deficit targets.

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Minister Nhlanhla Nene’s second Medium-term Budget Policy Statement (MTBPS) speech was overshadowed by a battalion of rioting students outside Parliament’s gates, intent on having their voices heard on the issue of increasing university fees. Amid criticisms that a ‘business as usual approach’ was taken inside Parliament while students were set upon by riot police outside, Old Mutual Investment Group Chief Economist, Rian le Roux, asks what the MTBPS actually had to say about the state of our economy and the noteworthy information that directly impacts you and I?

The bottom line is that Government is in a tight spot at the moment, facing an extremely constrained fiscal position, as is clearly evident from the Minister’s Statement, according to le Roux.  “On the one side they are facing a slowing economy – which means tax revenue growth is challenging –   and on the other side we have pressure on state spending, particularly from social spending, a rapidly growing public sector wage bill and surging debt service costs.”

Le Roux believes that this squeeze highlights the urgent need for Government to introduce reforms that will stimulate economic growth in South Africa – something that private sector economists, the business fraternity, rating agencies and international institutions have been urging for some time.

The urgency of our economic situation is no more evident than in the cutting of the Medium-term Budget’s economic growth forecast for 2015 from 2.0% to 1.5%; from 2.4% to 1.7% for 2016; and from 3.0% to 2.6% for 2017. 

“The Budget deficit – which is a country’s financial health status, where expenditures exceed revenue – remains a concern, as the MTBPS announced it has risen from the budget estimate of 2.6% to 3.3% in 2016-17, and from 2.5% to 3.2% in 2017-18,” he explains.

“While it was generally expected that the Minister would raise the budget deficit target for the period beyond 2015/16, the increases were certainly more than expected, and financial markets reacted negatively, with the rand weakening and bond yields rising.” However, he says that this Budget outcome is unlikely to result in a downgrade from the ratings agencies like Moody’s and S&P over the short term, but there is still the risk of a downgrade by Fitch in December and the disruption by student rioters probably hasn’t helped matters. 

“Taking into account Government’s considerable and increasing fiscal constraints, its primary fiscal goal is to stabilise the level of Government debt over the next few years.  Net government debt is forecast to stabilise at 45.4% of GDP in 2019/20, which is only slightly higher than what was forecast in the February 2015 Budget.  Stabilising our debt position is vital if South Africa wants to maintain its investment grade rating from the key rating agencies.”

Probably the most positive sign to come out of the MTBPS is that some easing of the pressure on the expenditure ceiling will be provided by the fact that the additional cost of the wage deal is to be financed from the contingency reserve (Government’s rainy day fund to protect against unexpected adverse developments), while a reallocation of other spending items is under way, according to le Roux.. “However, adhering to expenditure targets will require strong control, something that will be difficult for Government in the face of rising spending pressures.”

Added to this, public sector staff numbers are stabilising.  “In fact, compared to March 2012, total employment in national departments plus provincial government has declined slightly from 1.326 million to 1.317 million,” he says.  But the positive impact of these reduced numbers is being offset by above-inflation wage increases and occupation-specific remuneration adjustments.  “At least it seems greater control is being exercised over staff numbers as containing employment numbers, in the face of the lucrative civil servant wage deal of earlier this year, is crucial to containing overall wage costs in the Budget.”

However, the MTBPS showed that growth in Government spending (excluding debt service costs) – a significant chunk of which goes to civil servant wages – will grow by 6.8% per annum to 2018/19. According to le Roux, this highlights the increasing need for tight focus on the spending that government can indeed control. 

Last modified on Tuesday, 27 October 2015 21:53

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