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#Budget2019 could be "pouring money into a sieve"

Tito Mboweni on the way to deliver his #Budget2019

South Africa's Finance Minister Tito Mboweni delivered his budget in the country's parliament on Wednesday 20th February which included a growing deficit that economists have warned is going to drag on the country going forward.

The Budget reading was interspersed with quotes from the Bible which pundits pointed out was apt considering South Africa's precarious economic condition.

“Even though I walk through the darkest valley, I will fear no evil, for you are with me; your rod and your staff, they comfort me," said Mboweni, quoting Psalm 23.

Given that South Africa recently experienced a week of unscheduled blackouts or what is known as "load shedding" the Minister's quote was seen as doubly ironic.

Under previous President Jacob Zuma's watch, the budget deficit accelerated within 24 months to its highest level since democracy in 1994. This is being closely monitored by the world's rating agencies.

Mboweni warned that the National Treasury forecast a deficit of 4.5% which was higher than economists predicted, and heading towards the 6.5% which Zuma's government was responsible for in 2010.

The Finance Minister told parliament that there was pressure from agencies and in particular, Moody's as the deficit would cause borrowing. There is a double-whammy approaching for the ruling party just before the May 2019 elections, with Mboweni pointing out that the State Owned Entities which had caused much of the deficit through unsustainable business being possibly out of time with the period in history.

"On other state-owned enterprises, we are reviewing our framework for state-owned enterprise support. Government has revised the contingency reserve upwards to R13 billion for 2019/20 to respond to possible requests for financial support," said Mboweni.

But the Minister is grappling with entrenched interests including the labour movement which has seen its membership dropping on flatlining GDP growth over the past two years. So it has naturally turned to the African National Congress which it regards as an ally to provide lower and middle class jobs - particularly in the State Owned Entities like Eskom and South African Airways.

Mboweni was at pains to explain that "financial support will be budget neutral as far as possible."

Yet during this past financial year, total guarantee utilisation increased by R51.1 billion including :

  • Eskom used an additional R50 billion of its R350 billion guarantee in 2018/19.

  • Denel was granted a further R1 billion guarantee.

  • SAA guaranteed debt increased by R6.2 billion.

The only bright light shining in the darkness, said Mboweni, but he went on to warn that "pouring money directly into Eskom in its current form is like pouring water into a sieve. "

"The SOEs pose very serious risks to the fiscal framework," he continued "funding requests from SAA, SABC,Denel, Eskom and other financially challenged state-owned enterprises have increased, with several requesting state support just to continue operating. Isn’t it about time the country asks the question: do we still need these enterprises? If we do, can we manage them better? If we don’t need them, what should we do? "

This is a question that economists have asked for a decade. Eskom for example was behind Zuma's decision to reverse a rewable power process that had put South Africa at the forefront of green energy movements in 2011. As the State Capture hearings have indicated, the notorious Gupta family were essentially behind those moves, along with an attempt by Zuma to sign a bankrupting agreement with the Russian Government over future nuclear power stations.

The usual tax increases were announced by Mboweni, including increased tariffs on alcohol and tobacco, along with another fuel tax nudge.

South African President Cyril Ramaphosa speaking at at the State Security Agency

But these are not enough to cover a budget shortfall and as Moody's and other may decide to lower South Africa's ratings, the country would face massive interest on any kind of loan.

While the government aims at what it calls the Fourth Industrial Revolution which is rooted in technology growth, its own monopoly, Eskom, is not sustainable. Without steady electricity in the modern world, no state is able to grow if its main strategy is to target ICT and other tech sectors.

The other main fiscal drag is being caused by the government's massive public sector wage bill. Government jobs used to be regarded as lower paying in South Africa, but that is no more. A top position in government is now higher paid than the equivalent in the corporate sector.

The Finance Minister said this was no longer going to be the case.

“The public wage bill is unsustainable. We must shift expenditure to investment. The first step is to allow older public servants who want to do so, to retire early and gracefully. This will save an estimated R4.8 billion in 2019/20, R7.5 billion in 2020/21 and R8 billion in 2021/22.”

However, as older public servants retire, the skill shortage will also grow. Another conundrum for a government that is facing elections in May 2019 and battling to keep the lights on, and its lower middle class voters motivated as they face possible retrenchments.

One of the areas government is now looking at to bridge the fiscal gap is tax. The South African Revenue Service (SARS) said on Thursday 21 February that it is is intensifying its effort to identify and bring to book tax dodgers.

In particular, the illicit tobacco industry is going to face new SARS units designed to track, trace and imprison those importing tonnes of tobacco from neighbouring states like Zimbabwe.

After the budget speech on Wednesday, SARS Commissioner Mark Kingon, indicated that the Receiver would be acting more aggressively against these interests.

Standing alongside Kingon, the Finance Minister said these illegal businesses would face a great deal of pressure and that the loss to the fiscus for illicit sales was more than R7 billion ($500m). But there were other sectors too which will be targeted.

“In the fuel space, we are seeing considerable amounts dripping and ghost exports, where duties are not being paid. “In clothing and textiles, there’s an effort to firstly detect illicit duties," said Mboweni.

“There are comments being made at the State capture commission, where direct notices have been given regarding tax abuse, fraudulent invoices being created and the splitting of salaries. These things are being dealt with by the Unit.”

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