2020 National Budget: South Africa needs urgent national debt stabilisation to prevent a fiscal crisis

24 February 2020

Note to Editors: The following statement was delivered by the DA Shadow Minister of Finance, Geordin Hill-Lewis MP, at a press conference in Parliament ahead of the National Budget on Wednesday. Hill-Lewis was joined by DA Member on the Appropriations Committee, AshorSarupen MP, and DA Shadow Minister of Public Service and Administration, Dr Leon Schreiber MP. 

The full preview document can be accessed here.

Overview

Minister Tito Mboweni’s budget speech on Wednesday 26 February 2020 must address South Africa’s immediate fiscal crisis, described by four devastating simultaneous pressures:

the unrestrained expansion of public debt means more is spent on interest charges, and there is less money for essential services;

the sharp decline in tax revenues because of near-zero economic growth means there is less money for essential services;

the ballooning of the public wage bill which means less money for essential services;

continuous enormous bailouts for zombie state-owned companies, which means less money for essential services.

If this does not change in a very significant way, then South Africa will lose its only remaining investment-grade credit rating and will not avoid a solvency shock.

If Minister Mboweni does not make some ‘crunch-time’ commitments that will arrest this situation, then his budget will simply not be credible.

There is already a growing credibility gap between the strong language in budget speeches on cutting debt and the public wage bill, and achievements to date.

Despite the stern commitments in last year’s budgets, national debt, measured as net loan debt, is set to increase to a staggering R4,2 trillion, or 67,5% of GDP by 2022/23. That is if there are no further revenue shortfalls, an increasingly unlikely outcome.

Therefore, the only real important test of this budget’s credibility is the seriousness of the plans presented to rein in national debt, cut the public wage bill, and grow the economy. That is how we will judge the Minister’s speech.

We also make a number of positive and proactive proposals for how to turn our fiscal and growth crisis around:

A fiscal anchor for South Africa:

As part of our core budget proposals, the Democratic Alliance is today presenting a legislative fiscal rule that will help to stabilise national debt. The Fiscal Responsibility Bill (FRB) will ensure that debt levels and debt service costs are kept under control in South Africa.

This kind of legislative fiscal anchor is an idea gaining currency around the world. In its 2019 Article IV consultation report on our economy, the IMF cautioned that ‘authorities should establish a credible debt anchor to stabilize debt in the medium term.’ Similarly, in November 2019, Moody’s Investor Services indicated that ‘it wants to see a credible fiscal strategy to contain the rise in debt in the budget’. On Wednesday, Minister Mboweni’s only priority should be to limit further debt growth while finding ways to grow the economy.

Tito Mboweni has recommended such fiscal anchors for South Africa, saying in his 2018 Medium Term Budget Speech: “New fiscal anchors may be required to ensure sustainability, in addition to the expenditure ceiling. We must choose public sector investment overconsumption.”

First, the Fiscal Responsibility Bill provides for:

a fiscal rule prescribing that, for each financial year from 2020/21 to 2023/24, net loan debt expressed as a percentage of GDP must not be more than it was the previous year.

Second, the Fiscal Responsibility Bill provides for:

a review of the fiscal rule by the National Assembly every four years, beginning in 2023/24 by either amending, renewing or terminating the fiscal rule; and

an annual Fiscal Responsibility Report to be tabled by the finance minister at the same time as the budget is tabled, setting out whether the fiscal rules were complied with or not, together with reasons for those outcomes, and recovery plans in the event of a failure to comply with the fiscal rule.

And, finally, because South Africa is a small open economy, vulnerable to shocks, the Fiscal Responsibility Bill provides for:

an exemption from the fiscal rule to be granted in respect of a specific financial year, or years, by the National Assembly upon application by the finance minister, with good cause having been shown and on the recommendation of the Standing Committee on Finance.

Our proposal to alleviate the electricity crisis:

We propose income tax incentives to assist individuals to generate electricity at their private residences for their own consumption. This will alleviate pressure from the grid, helping lower the load-shedding burden for other families, and importantly for businesses.

The DA is therefore proposing an Emergency Solar Rebate (ESR) that would offer tax rebates for solar systems installed at residential properties.

This Emergency Solar Rebate would be available for three years only, designed to alleviate our current energy crisis, and would work as follows:

100% tax deduction for the cost of installed solar equipment, up to a maximum of R75 000

The purchaser would fund the cost of installation upfront, and would claim the cost against their taxable income at the time of submitting their ordinary annual returns.

This emergency initiative would cost R4 billion over 3 years, and remove 480 MW from the grid, with even a moderate take-up rate.

Our proposal to cut the primary deficit

Economic growth is will average below 1% this year, with a likelihood of a further revision downwards. This low growth trap means that South Africa will continue to miss revenue targets due to declining VAT and corporate receipts, and as unemployment continues to tick upwards.

This paucity of growth also means there is no question of raising new revenue through new taxes. New taxes would only act as another brake on growth. The DA does not support any new tax measures.

In last year’s budget, the failure to adjust income tax brackets for inflation led to a stealth tax increase of R12 billion from working families pockets. This should not be repeated.

Next year, at current expenditure levels, the budget deficit is expected to reach R374 billion, 6,8% of GDP, and 35,3% of total government expenditure.

In order to stabilise the budget deficit, bring down debt and restore fiscal discipline, there is an urgent need to reduce spending by R250 billion over the next three years, averaging R83 billion per fiscal year.

The DA’s plan to stabilise the budget deficit and the national debt will be achieved by achieving the significant cuts in the public wage bill that the Minister has called for, but has not shown in progress in delivering; as well as by stopping all bailouts to failing zombie state-owned entities.

These changes will achieve an adjustment of R349,95 billion over the MTEF period.

It has become morally indefensible for government to continue bailing out SOEs despite clear evidence that they are beyond saving due to years of state capture and poor management. A choice has to be made on whether to keep throwing money at these zombie SOEs or to protect essential public services: policing, education and healthcare.

Expenditure Cuts

The DA proposal to stop all bailouts to SOEs will help realise R35,1 billion in the 2020/21 financial year:

R33 billion will be recovered from the bailout to Eskom in 2020/21;

R1 billion reserved for Denel in 2020/21;

The outstanding R1,1 billion from the approved R3,2 billion bailout for the SABC.

In addition to the R35,1 billion realised from SOE bailouts, the DA is still the only party that has presented credible plans for how to achieve the public wage bill savings that the Minister has targeted.

In October 2019 we presented a credible, costed plan to achieve a R168 billion cut to the public wage bill over the next three years through:

Freezing the wages of the 33,7% of public servants not covered by the Occupation Specific Dispensation (OSD) (including the likes of highly paid head office managers and supervisors) at 2019/20 levels over the three-year MTEF period. This would protect the real front-line delivery staff, and would also yield R138,6 billion;

Saving another R29,4 billion over the MTEF period through reductions and a hiring freeze on all managerial positions (non-OSD levels 11 to 16) until the number of managers is reduced by a third – approximately 9 200 posts.

To plug the revenue gap and raise the requisite funds to facilitate productive investments in the economy, government has to consider potential revenue that could be raised from its asset inventory. The DA proposes once of revenue raising mechanisms and cuts over the MTEF period that can raise R67,85 billion:

Once-off mechanisms:

Auctioning digital spectrum would raise 5 billion

Selling Telkom shares would raise 5 billion

Selling Sentech would raise 8 billion

Cuts over MTEF period:

Eliminating New Development Bank funding would save 25 billion

Eliminating National Health Insurance funding would save 8 billion

Summary

The DA is making credible, costed and positive alternative budget proposals.

Our proposals aim to get debt under control, but introducing a Fiscal Responsibility Bill which would limit the amount of new government borrowings.

Our proposals aim to alleviate the energy emergency by incentivising homes to get off the grid, through an Emergency Solar Rebate.

And finally, we show how we will reduce public wage expenditure to stabilise debt, reduce the deficit and restore fiscal discipline.

In his 2020 National Budget presentation, Minister Mboweni must:

Present a credible plan to stabilise national debt, contain the budget deficit and prevent a fiscal crisis;

Provide pathways for energy market liberalisation to give South Africans choice over their energy needs;

Stop the immoral and indefensible bailout of all SOEs; and

Initiate cost containment measures to the public wage bill.

Issued by Geordin Hill-Lewis,DA Shadow Minister of Finance, 24 February 2020