South Africa's Mid Term Budget 2017 - Summary & Speech PDF

Growth projection revised down to 0.7%

Finance Minister Malusi Gigaba says National Treasury has revised economic growth projections downwards to 0.7% for 2017.

The Minister said this not long after the country’s economy slipped out of a technical recession that was brought about by a -0.7% slump in the first quarter of 2017 after dwindling by 0.3% in the final quarter of 2016.

“We have had to revise economic growth projections downwards from 1.3%, as tabled at the time of the budget, to 0.7% for 2017.

“Growth is subsequently expected to increase slowly reaching 1.9% in 2020,” the Minister said.

The Minister said this when he tabled the Medium Term Budget Policy Statement (MTBPS) in the National Assembly on Wednesday.

“Therefore, we have the power to change our course, the political, social and economic agency to chart a new path.”

He said the global environment may be helpful as growth is improving, despite persisting risks.

The International Monetary Fund (IMF) projects that global growth will average 3.6% in 2017 and reach 3.7% in 2018, the Minister said.

“The positive global outlook reflects a recovery in demand and trade in Europe and Asia. World trade volumes are expected to increase by 4.2% in 2017. Low interest rates in the United States, Europe and Japan remain supportive of growth.

“The US will reach its pre-crisis average growth rate of 2.3% next year, which bodes well for global conditions.”

Contributing factors to growth

According to National Treasury, revisions to the forecast reflect a significant deterioration in business and consumer confidence over the past year.

Other contributing factors, National Treasury said, include weaker-than-anticipated growth in the fourth quarter of 2016, a large contraction in the finance sector in the first quarter of 2017 and a higher risk premium, reflected in higher bond yields.

“The impact of domestic factors on economic growth has been partially offset by improved global growth and commodity prices. Growth in household spending increased marginally to 1.1% in the first half of the year from 0.6% over the same period of 2016,” Treasury said.

Expenditure on durable goods, such as vehicles and washing machines, contracted during the first half of 2017. A 2.1% contraction in real household disposable income in the first quarter was followed by growth of 4.5% in the second, supported by rising real wages.

“Nominal year-on-year growth in employee compensation was 7% in the second quarter, with strong increases in general government services. High debt levels continue to constrain household spending. The ratio of household debt to disposable income was 73% in the first half of 2017, compared with 75% in the same period in 2016. Growth in household consumption expenditure is projected to increase to 1% in 2017, reaching 1.9% in 2020 as employment growth strengthens and confidence improves,” Treasury said.

Presidential Task Team to stabilise rising national debt

A team of Cabinet Ministers has been brought together to come up with solutions aimed at stabilising debt over the next three years, the National Treasury said on Wednesday.

In the Medium Term Budget Policy Statement, which Finance Minister Malusi Gigaba tabled in the National Assembly on Wednesday, National Treasury said government will adhere strictly to the spending limit that it has set itself.

“A combination of fiscal measures and economic interventions is needed to grow the economy, address immediate challenges facing the public finances and reduce long-term risks. A team of Cabinet ministers reporting directly to the President has been established to develop proposals to stabilise the national debt over the medium term.”

The National Treasury said this will include proposals to narrow the deficit, stimulate economic growth and build investor confidence.

The team of Ministers will work to ensure the spending ceiling remains intact in the current year.

“A broader set of asset disposals is also under consideration, along with a restructuring of the portfolio of public assets to reduce risks posed by contingent liabilities. A new framework for the management of guarantees is being developed.

“Additional measures to reduce expenditure, raise revenue and improve the impact of public resources on economic growth will be announced in the 2018 Budget.”

As a result of revenue shortfalls, the consolidated budget deficit for 2017/18 is expected to be 4.3% of GDP, compared with a 2017 Budget estimate of 3.1%.

The main budget deficit, which determines government’s net borrowing requirement, will be 4.7% of GDP this year.

“In contrast to projections set out in the last budget, the revised projection is for the deficit to remain at this elevated level over the next three years. On this estimate, gross national debt is projected to continue rising, reaching over 60% of GDP by 2022.”

National Treasury said in this context, government is faced with difficult choices.

“To offset revenue shortfalls and reduce borrowing, the contingency reserve has been pared down to R16 billion over the next three years. This leaves government little room to manoeuvre if risks to the expenditure ceiling materialise.

“Beyond this, it is likely that some programmes will need to be eliminated, or their funding reduced. South Africa’s stated policy aspirations and its social needs far exceed available public resources. Moreover, there is little space for tax increases in the current.”

National Treasury said over the past four years, government has followed a path of measured fiscal consolidation, aiming to stabilise the debt-to-GDP ratio by reducing spending and introducing tax increases.

The National Treasury said this strategy was met with some success and that it reflected in a narrowing primary deficit.

But debt has continued to rise as a share of GDP as economic growth rates have declined.

The National Treasury said any new policy proposals, or expansion of existing programmes, should address only the most effective and necessary interventions.

It said government remains committed to operating within the expenditure ceiling over the next three years.

In the current year, however, the recapitalisation of SAA and the South African Post Office put the ceiling at risk of a R3.9 billion breach. In addition, there are several risks to the fiscus over the period ahead:

- The economy and revenue could underperform projections. The GDP growth outlook may be improving, but the relationship between growth and revenue collection could deteriorate further.

- Strains and imbalances within the public finances may become more pronounced. The public-sector wage bill has increasingly crowded out other spending and limited government’s ability to increase public employment.

- Debt-service costs are set to absorb a rising share of revenue.

- Several years of fiscal restraint have left funding gaps in both infrastructure and social services, reflected in the build-up of unpaid accounts and financial imbalances.

- Continued financial deterioration of major state-owned companies is a clear and substantial danger to the public finances.

Expenditure ceiling to be breached by R3.9 billion

Government spending is expected to breach the expenditure ceiling by R3.9 billion this year, National Treasury said on Wednesday.

This comes after expenditure ceilings were introduced in the 2012 Budget to enable government to manage departmental spending levels in the context of a constrained fiscal framework.

Allocations made over a three-year period, also referred to as the medium term, provides an agreed-upon upper limit within which departments prepare their budgets.

Ahead of Finance Minister Malusi Gigaba delivering the Medium Term Budget Policy Statement (MTBPS), National Treasury said the expenditure ceiling has been lowered by R7 billion for 2018/19 and R15 billion for 2019/20 as a result of reductions to the contingency reserve.

“Interest payments are excluded from the expenditure ceiling. So are payments for financial assets funded by the sale of assets in the same year. This principle was applied to the R23 billion allocation to Eskom in 2015, which was financed by the sale of government’s Vodacom shares.

“Expenditure is expected to breach the ceiling by R3.9 billion in the current year. This is the result of large appropriations for South African Airways (SAA) and the South African Post Office (SAPO). [Combined], these allocations amount to R13.7 billion.

“Government is considering the disposal of assets to offset these appropriations. Should such disposals take place, the breach will not occur.”

National Treasury said to offset revenue shortfalls and reduce borrowing, the contingency reserve has been pared down to R3 billion in 2018/19, R5 billion in 2019/20 and R8 billion in 2020/21.

The lowering of the contingency reserve leaves government with little room to manoeuvre should risks to the expenditure ceiling materialise.

“Moreover, further reductions in the ceiling may be required to stabilise national debt. A Presidential committee will consider options in this regard to be tabled as part of the Medium Term Expenditure Framework tabled with the 2018 Budget.”

Medium term risks

National Treasury said various risks and pressures need to be taken into account over the medium term, including:

• Additional spending commitments may emerge from policy processes under way. Government is evaluating the implications of providing fee-free higher education and training to poor and middle-income students.
Other policy commitments include the National Health Insurance (NHI), proposals in the Defence Review, improved Early Childhood Development (ECD), accelerated land reform and several large infrastructure project proposals.

• The inflation outlook has been revised down compared with the 2017 Budget, relieving pressure on inflation-linked expenditure, such as the wage bill. However, public-sector remuneration budgets pose a large and imminent risk, with the possibility that some national and provincial departments will exceed compensation ceilings.

• A new civil service wage agreement, in which salary increases exceed consumer price inflation (CPI) and without headcount reductions, would render the current expenditure limits difficult to achieve.

• Several State-owned companies persistently demonstrate operational inefficiencies, poor procurement practices, weak corporate governance and failure to abide by fiduciary obligations.

Difficult times ahead as budget deficit widens to 4.3%

Government’s consolidated budget deficit is set to widen to 4.3% this year, the National Treasury said on Wednesday.

In its Medium Term Budget Policy Statement documents, the National Treasury attributed this to a sharp deterioration in revenue collection and further downward revisions to economic growth projections, which it said significantly eroded government’s fiscal position.

The National Treasury said tax revenue is projected to fall short of the 2017 Budget estimate by R50.8 billion in the current year, the largest under-collection since the 2009 recession.

At the same time, additional appropriations of R13.7 billion have been agreed to forestall calls against guaranteed debt by the creditors of South African Airways (SAA) and the South African Post Office.

“These are partially offset by use of the contingency reserve, as well as projected underspending.

“As a result of these developments, the consolidated budget deficit will widen to 4.3% of GDP in 2017/18, against a 2017 budget target of 3.1% of GDP.”

The widening of the budget deficit comes after years of expenditure restraint after government imposed state-wide austerity measures with an aim of putting an end to abuse and to save resources that can be directed to priority spending areas.

The National Treasury said government’s short-term options to reverse this situation are limited.

“Given that per capita income is falling, the economic impact of further expenditure cuts or tax hikes could be counter-productive.

“Following several years of expenditure restraint, further budget cuts will involve hard choices and difficult compromises.

“Sudden or deep additional cuts that are not well-targeted could put severe pressure on already stressed departmental budgets.”

The National Treasury said some national departments are battling to operate within the compensation limits set by Parliament in the current year.

Added to this, several provincial departments are running up unpaid bills to maintain service delivery levels.

At the same time, government is acutely aware of the dangers of unchecked debt accumulation.

Debt-service costs are the fastest-growing category of expenditure, crowding out social and economic spending. By 2020/21, nearly 15% of main budget revenue will be spent servicing debt.

The National Treasury estimates that stabilising gross debt below 60% of GDP over the coming decade will require spending cuts or tax hikes amounting to 0.8% of GDP. In 2018/19, 0.8% of GDP would amount to R40 billion.

Government to dispose of its Telkom shares

Finance Minister Malusi Gigaba has announced that government will dispose of its Telkom shares in order to cover a shortfall of R3.9 billion.

The Minister said this when he tabled his maiden Medium Term Budget Policy Statement in the National Assembly on Wednesday.

The medium term budget – which projects spending over a three-year period – was presented under difficult circumstances.

“The expenditure ceiling is threatened in the current year as a result of government’s recapitalisation of South African Airways and the South African Post Office. We aim to avoid a breach of the expenditure ceiling this year through the disposal of assets.

“Government is disposing of a portion of its Telkom shares to avoid a breach, with an option to buy them back at a later stage,” the Minister said.

The Minister was referring to government spend that has resulted in the expenditure ceiling being breached by R3.9 billion.

With SAA set to receive total of R10 billion in bail out money – R5.2 billion already being paid through an appropriation and the remaining R4.8 billion to be paid in March, as well as R3.7 billion to recapitalise the SA Post Office.

In the Medium Term Budget Policy Statement, National Treasury said payments for financial assets are funded by the sale of assets in the same year. The principle was applied to the R23 billion allocation to Eskom in 2015, which was financed by the sale of government’s Vodacom shares.

Tough economic times after previously announced austerity measures

The Minister said over the past four years, government has followed a path of measured fiscal consolidation that aimed to stabilise the debt-to-GDP ratio by reducing spending and introducing tax increases.

He said this strategy was met with some success and was reflected in a narrowing primary deficit. But of late, debt has continued to rise as a share of GDP as a result of declining economic growth rates.

“This year, sluggish economic growth has caused a significant reduction in the tax revenue outlook which has significantly eroded government’s fiscal position.

“Tax revenue is projected to fall short of the 2017 Budget estimate by R50.8 billion in the current year, the largest downward revision since the 2009 recession,” he said.

Government has been carefully deliberating on the best fiscal strategy to ensure the programme of measured fiscal consolidation is not derailed.

None of the options are free of pain, the Minister said.

“Some would argue for the imposition of more austere measures to aggressively rein in the growth of public debt. Others might argue that to reduce spending levels would further damage the economy. Government’s short-term options to reverse this situation are limited.”

He said government would, over and above disposing of a portion of its Telkom shares, consider fiscal efforts – a mix of expenditure cuts and revenue increases – to address some of the revenue shortfall.

“Announcements will be made on these fiscal efforts at the time of the 2018 Budget,” he said.

Anti-competitive firms to be restricted from state procurement

The Office of the Chief Procurement Officer will extend its fight against fraud and corruption to cover the private sector, Finance Minister Malusi Gigaba said on Wednesday.

Tabling the Medium Term Budget Speech in Parliament on Wednesday, the Minister said: “The fight against fraud, corruption and abuse of supply chain management system is being extended to cover both public and private sector corruption. This includes restricting companies found to have contravened competition laws through collusive practices which rob government and citizens of billions of rands.”

The Minister said this as National Treasury, through the Office of the Chief Procurement Officer, moves to tighten and modernise government procurement in order to root out tender corruption, fraud and abuse of the supply chain management system.

The Office of the Chief Procurement Officer has managed to expose corrupt activities in certain government institutions and state-owned enterprises through the review of contracts above R10 million.

“The fight against corruption is being accelerated and National Treasury is currently working with law enforcement agencies to investigate contracts which are alleged to be irregularly procured in certain state-owned enterprises,” he said.

The Office of the Chief Procurement Officer has strengthened initiatives to modernise procurement through the use of technology to automate procurement processes to simplify and reduce the costs of doing business with the state.

The initiatives are also aimed at reducing the cost of doing business with government and to generate savings through centrally arranged contracts and the implementation of a differentiated procurement approach through strategic procurement initiatives.

“The National Treasury and provincial treasuries are working with relevant government departments in identifying sectors and commodities for potential investment by black industrialists to promote local industrialisation and local economic development for job creation.”

The Minister said, meanwhile, that the payment of invoices to suppliers within the prescribed 30 days is critical for small and medium enterprises.

Failure to do so has a devastating effect on small businesses, and is a financial misconduct in terms of the Public Finance Management Act and the Municipal Finance Management Act.

“Therefore, accounting officers and accounting authorities who fail to do so should be charged for financial misconduct. There must be consequence management in this regard.

“Further, performance agreements of accounting officers and accounting authorities must include timeous payment of suppliers as one of the key performance areas.”

The Minister said, meanwhile, that since the introduction of expenditure ceilings and the implementation specific cost containment measures in 2013, spending on consultants, travel, accommodation, catering, advertising and conferences has declined by R2 billion.

Government proposes changes to conditional grants

Government on Wednesday announced proposed changes to health conditional grants over the Medium–Term Expenditure Framework (MTEF).

In the Medium Term Budget Policy Statement (MTBPS) tabled by Finance Minister Malusi Gigaba, government proposed changes to the grants saying a component will be introduced in the comprehensive HIV, AIDS and TB grant to standardise the Community Health Worker Programme.

It further stated that a portion of the direct health facility revitalisation grant and the infrastructure component of the indirect national health insurance grant will be ring-fenced for maintenance.

Additions of R22.4 million to the national tertiary services grant have also been proposed and will extend the diagnosis-related groups project across the Western Cape and build capacity for other provinces to implement this initiative.

The diagnosis-related group approach is a patient classification system used globally for payment of hospital services.

The MTBPS also noted that spending on the indirect school infrastructure backlogs grant has been poor for a number of years and was scheduled to come to an end in 2017/18.

“However, the Department of Basic Education needs to complete projects that are underway. Government now proposes that R7.3 billion that had been shifted to the provincially-administered education infrastructure grant, but had not been allocated to specific projects, be returned to the department’s school infrastructure backlogs grant over the 2018 MTEF period.”

Within the direct education infrastructure grant, the remaining R1.5 billion shifted from the school infrastructure backlogs grant in the 2017 MTEF will be ring-fenced to maintain existing school infrastructure.

Human Settlements

Meanwhile, a full review of the human settlements development grant will be conducted based on the outcomes of the human settlements policy review. For the 2018 Budget, two new human settlements grants are proposed, both to be funded through reprioritisations from the human settlements development grant.

“Funds previously ring-fenced to clear the backlog of title deeds that have not yet been issued for homes built with state subsidies will now be allocated in a dedicated grant for a three-year period. The grant will have both direct and indirect components, with a small portion reprioritised for capacity in the national department.

A grant will be established to fund responses to emergencies in line with housing policy. The funds will be held by the Department of Human Settlements and transferred to provinces or municipalities following an emergency.

Funds to maintain coal haulage roads in Mpumalanga will be ring-fenced in the provincial roads maintenance grant for another two years.

Medical tax credit

When coming to medical tax credits, National Treasury is considering changes to the design, targeting and value of the medical tax credit as part of the policy development process for the 2018 Budget.

In the budget tabled in February, it was stated that consideration is being given to possible reductions in this subsidy in future. In 2012, government moved from a system of deductions for medical aid contributions and qualifying expenses to a system of tax credits independent of taxable income.

“National Treasury is considering changes to the design, targeting and value of the medical tax credit as part of the policy development process for the 2018 Budget. Tax data, however, indicates that the programme is well-targeted to lower and middle-income taxpayers. The National Treasury will seek input from the Davis Tax Committee on the feasibility of proposals to adjust the medical tax credit to fund the National Health Insurance (NHI),” stated the MTBPS document.

In 2014/15, 3 million taxpayers claimed the credit on behalf of 8 million medical scheme members, resulting in a tax expenditure of R18.5 billion.

Meanwhile, Treasury and the Department of Health is working on proposals to expand NHI services in a progressive and affordable manner.

“Legislation is being drafted to establish the legal framework for an NHI Fund. Government is considering options to establish an interim fund structure to support a limited set of priority interventions, and operate in line with current legislation.

Streamlining to benefit national development

Government’s Mandate Paper proposes to cut programmes that are not aligned to the National Development Plan (NDP) to strengthen the alignment of the national budget.

“To support spending in these areas, the Mandate Paper proposes to cut programmes that are not aligned to the NDP (“non-core”), or which are not realising their intended outcomes,” reads the Medium Term Budget Policy Statement (MTBPS), tabled by Finance Minister Malusi Gigaba on Wednesday.

Prepared by the Department of Planning, Monitoring and Evaluation (DPME), the paper serves as a Cabinet-endorsed mandate against which departments and public agencies should refine their plans and budget proposals.

The purpose is to strengthen alignment of the national budget, the Medium Term Strategic Framework (MTSF) and NDP during the final 24 months of the current administration.

“The paper observes that on the current trends, South Africa is unlikely to achieve its NDP goals. It also notes that there will be no additional funds available to increase baseline expenditure over the 2018 Budget, and some programmes might have to be cut to meet unanticipated spending pressures,” noted the MTBPS.

Seven focus areas to streamline spending

The Mandate Paper establishes key expenditure priorities and identifies focus areas that should be addressed in the 2018 Budget.

Reducing spending on consultants; establishing strict limits on contingent liabilities and litigation costs, and ensuring that the initiatives of the Office of the Chief Procurement Officer take effect are some of the suggestions that the document makes to departments.

Departmental submissions for the 2018 Budget complement the Mandate Paper priorities, with several proposals that require large additional resource commitments. These include significant additional funding for the post-school education and training system, National Health Insurance (NHI), qualified teachers for Grade R and the implementation of the Defence Review, among others.

When coming to job creation and small business development, the paper speaks to the implementation of 30% set-asides, localisation and integrated community development and community-based workers.

With regards to the 2018 Budget, the Mandate Paper states that youth development should include developing business opportunities for youth, including access to the internet, as well as scaling up labor-intensive programmes, learnerships and artisan training.

Confidence boosting measures

At a briefing at the Johannesburg Stock Exchange (JSE) in July, Minister Gigaba unveiled details of inclusive economic Growth Action Plan, a plan which will inspire confidence in the country.

In his maiden MTBPS to Parliament, Minister Gigaba said government recognises that the best way to ensure the sustainability of public finances is to achieve higher economic growth.

“We aim to kick-start inclusive growth by implementing the 14 measures to improve confidence and accelerating progress on structural and microeconomic reforms. Delivery on these commitments will be complemented by a stimulus package, options for which are being considered,” said Minister Ggigaba.

The MTBPS gave an update of the plan. The Budget Facility on Infrastructure, ran by National Treasury and the Presidential Infrastructure Coordinating Commission, received 59 project submissions, with an aggregate funding requirement of R135 billion. Several projects have been recommended for detailed appraisal.

Meanwhile, negotiations on the next public-service wage agreement are under way.

In the area of creating policy certainty by finalising key legislative and policy processes, the Council for Scientific and Industrial Research has completed a study on spectrum availability and open access.

The Competition Commission has also launched a market inquiry to investigate data prices, while draft legislation is being finalised to facilitate the licensing of Postbank.

The mini-budget noted that the implementation of the revised Mining Charter has been postponed to December 2017.

Twin Peaks regulations to be published for public comment

Finance Minister Malusi Gigaba says he will soon release regulations aimed at implementing the Twin Peaks System for public comment.

“I will shortly be releasing for public comment draft transitional regulations to begin the process of implementing the Twin Peaks system.

“We are on track to create two new authorities in the 2018/19 financial year,” he said.

Tabling his first Medium Term Budget in the National Assembly on Wednesday, the Minister said the implementation of the Twin Peaks system of financial regulation will bring the much needed reform to the financial services sector.

He said it will create a new regulator for market conduct, which will substantially improve the way financial institutions treat their customers.

“For too long, consumers have been sold inappropriate products, and face high costs and a wall of opaqueness.

“For example, one of the furniture chains sold retrenchment insurance to retired people,” he said.

The Minister said there was a need for a transformative financial sector – a sector that is not only transformed, but one that is also transformative of the economy.

“The Standing Committee on Finance has done excellent work over the past few months holding hearings on all aspects of financial sector transformation.

“There is consensus that more can be done in transforming the sector.

“Their draft report carefully balances the competing interests of the nation as a whole, foreign investors, borrowers, lenders and ordinary South Africans,” he said.

The Minister said the report will assist in preparing for the Financial Sector Summit that he hopes will be held early next year.

He said the Summit would help government to take stronger steps in developing appropriate targets for the Financial Sector Charter, which accelerate broader transformation.

“In the interim, Minister [Rob] Davies and I support the latest version of the financial sector charter where all stakeholders have developed Sector codes in an integral and strategic vehicle to advance transformation in the economy at sectoral level.

“Sector codes provide sector stakeholders an opportunity to develop a common vision for the growth and transformation of their sector.

“The new financial sector code, supported by all stakeholders, sees transformation as being about not only ownership, but also skills development, targets for empowerment finance, access to credit, management control and the provision of services to previously underserved areas.”

Government to appoint new board for Eskom

Government will appoint a new board for power utility Eskom, Finance Minister Malusi Gigaba said on Wednesday.

Tabling the Medium Term Budget Policy Statement (MTBPS) in Parliament, Minister Gigaba said the new board will be appointed before the end of November 2017.

He said government is concerned at developments at the utility. The weak governance issues that are currently being experienced at the utility has led to a qualified audit opinion and a violation of some debt covenants with lenders.

“The failures of governance, leadership and financial management at Eskom are of a grave concern. Eskom is simply too important to the country to fail and we will not allow it to,” said the Minister.

A National Treasury team with the necessary expertise will work with the Department of Public Enterprises - under which Eskom falls - to address governance issues.

The team will report back periodically, said the Minister.

Minister Gigaba said Eskom is critical to South Africa’s development with the link between electricity infrastructure and economic growth.

Eskom, which has the largest state guarantee of R350 billion, forecasts that electricity sales growth over its planning period will be flat, with revenue growth secured through tariff increases.

The National Energy Regulator of South Africa (Nersa) could grant tariff increases below Eskom’s application, as it did during the multi-year price determination process for April 2013 to March 2018.

Nersa recently approved the process and timelines for processing Eskom’s revenue application for the 2018/19 financial year.

Eskom is asking the regulator for a total allowable revenue of R219 514 million. The total allowable revenue application translates to a 19.9% average increase in electricity tariffs.

The mini-budget noted there are also risks that sales growth will perform below projections, or decline as households and businesses improve their energy efficiency.

The MTBPS noted that any of the options required to stabilise Eskom could have significant fiscal implications.

“If higher tariffs slow economic activity, tax revenue collections will be lower, delaying government’s fiscal objectives of closing the deficit and stabilising debt. However, if Eskom does not secure sufficiently high tariff increases its financial position may weaken, requiring it to seek government assistance.”

In addition, government has extended its R350 billion guarantee from 31 March 2017 to 31 March 2023 because of delays in Eskom’s capital investment programme.

The extension of the guarantee will allow Eskom to use the remaining portion to complete its planned capital expenditure programme. The utility’s board has developed a plan to address governance concerns that they will share with lenders.

Meanwhile, Nersa is expected to rule on Eskom’s application for a tariff increase for 2018/19 as well as its Regulatory Clearing Account application.

“If these applications are successful it would represent a step-change in Eskom’s future revenues. Combined with strong cost management, this could allow the utility to cover all its obligations without fiscal support.” said the MTBPS.

SAA to receive R4.8 billion cash injection

The national carrier, South African Airways, will receive a further R4.8 billion government guarantee by March next year.

The 2017 Medium Term Budget Policy Statement (MTBPS) tabled by Finance Minister Malusi Gigaba on Wednesday states that government has issued a R19.1 billion guarantee facility to the airline to ensure it continues to operate as a going concern.

“Total recapitalisation of R10 billion will be provided in 2017/18. An amount of R5.2 billion has already been provided, with the remaining R4.8 billion to be transferred by 31 March 2018.”

The funds will be used for working capital and to settle debt, enabling the airline to reduce its interest expenses.

Despite the capital allocation, government’s exposure to SAA debt remains significant at R15 billion.

“There is risk that if SAA’s financial fortunes do not improve, there will be further calls on the remaining guarantee,” noted the MTBPS.

SAA, which was moved from the portfolio of Public Enterprises to National Treasury in 2014, has been struggling to pay its lenders and service providers.

At the end of September, National Treasury announced that government had approved a R3 billion transfer from the National Revenue Fund (NRF) to SAA to meet its debt obligations to Citibank.

September’s transfer followed on another made in July.

Last week, Treasury announced the appointment of six new members to SAA’s board.

The MTBPS noted that the appointment of a new Chief Executive Officer – who will commence his duties on 1 November — is a critical step in ensuring that the airline's turnaround strategy is aggressively implemented.

In his address, Minister Gigaba said following his meeting with the SAA board, government will make pronouncements on plans to consolidate aviation assets.

“After we meet the new board of SAA, we will pronounce on our plans to consolidate aviation assets and bring in a strategic equity partner. We believe a strategic equity partner can play an important role in SAA’s turnaround as well as unlocking value for the fiscus which has invested significantly in the airline over the years,” said Minister Gigaba.

If SAA executes a successful turnaround in line with its projections by 2019/20, its reliance on guarantees will subside, as will government’s risk exposure.

Minister Gigaba said despite the current challenges faced by SAA, government remains convinced that retaining a national carrier is in the public interest.

The MTBPS, which is also known as the mini-budget, said the profitability of state-owned companies since 2012 has declined due to a combination of operational inefficiencies, governance failures and weak demand.

These factors have increased reliance on borrowing to fund operations, leaving several entities heavily indebted, without sufficient cash to service their debt obligations or even to run their operations.

The document noted that government’s major explicit contingent liabilities are its guarantees.

Government’s total guarantees

Total guarantees issued to public institutions, independent power producers and public-private partnerships stood at R688.8 billion in 2016/17. Total guarantee exposure was standing at R445 billion, because several entities had not fully used their available guarantee facilities.

Between 2011/12 and 2016/17, the combined profitability of state-owned companies (SOCs) measured by return-on-equity, declined from 7.5% to an estimated 0.2% with a growing portion of their operating expenditure being funded through debt.

National Treasury said lenders, alarmed by governance failures, are taking a more active stance and that as a result SOCs are having difficulty raising debt, or are forced to refinance debt at higher rates.

This situation creates liquidity challenges, leading to greater demands on the fiscus.

“Addressing this requires not only stabilisation measures at troubled entities, but a broader restructuring of state-owned companies and an acceleration of [SOCs] reforms.”

SOCs total interest payments

Meanwhile, total interest payments by state-owned companies are projected to increase from R49.8 billion in 2016/17 to R69.3 billion by 2019/20.

Given the sharp increase in interest commitments, some entities may have insufficient cash to settle their obligations unless immediate reforms are implemented to improve governance and boost profitability.

Higher education still a big part of SA’s transformation agenda

Higher education will continue to be placed at the centre of government’s transformation agenda, Finance Minister Malusi Gigaba said on Wednesday.

“The student movement has correctly put the issue of higher education at the centre of our transformation agenda. We cannot hope to grow and develop without the skills and intellectual capabilities that our universities and technical training colleges produce,” said Minister Gigaba in Parliament.

Tabling the Medium Term Budget Policy Statement (MTBPS), Minister Gigaba said the budget already makes an enormous contribution to higher education.

“The sector’s budget is the fastest growing element of expenditure over the medium term, rising from R77 billion this year to R97 billion in 2020/21. This includes the provision of financial assistance to subsidize the education of more than 450 000 students every year.”

Minister Gigaba said it is clear that more still needs to be done.

In August, the Heher Commission of Inquiry into Higher Education and Training delivered its final report to President Jacob Zuma.

“We await the President’s determination and announcement in this regard. Although the fiscal constraints we face are real and binding, we must make every effort to ensure that no academically deserving student is excluded due to financial constraints. Further announcements will be made in the 2018 Budget,” said the Minister.

In 2016, the National Student Financial Aid Scheme (NSFAS) provided financial assistance to 225 950 university students, whose family income was below R122 000 per year. This amounts to about 30% of university undergraduates.

In general, NSFAS loans and bursaries are only able to cover a portion of the full cost, given the many students requesting aid. Tuition fees account for about 35% of the full cost of study, which includes lodging, food and textbooks.

The MTBPS document noted that if NSFAS were to cover the full cost of study for the 30% of undergraduates who currently qualify, the scheme would require about R10.7 billion in the 2018 academic year, in addition to the R11.4 billion currently available.

“Proposals have been made to extend the provision of financial aid to students from middle-income households. Estimates of the number of students falling within this threshold are unreliable. Government is working with universities to verify the data,” noted the document.

Spending on social security

When coming to spending priorities, government will continue to protect spending on core social programmes that benefit poor South Africans.

Over the next three years, consolidated spending will increase by an annual average of 7.3%, from R1.6 trillion in 2017/18 to R1.9 trillion in 2020/21.

Government proposes to allocate R11.1 billion over the medium term for infrastructure projects at higher education institutions.

The MTBPS document stated that expanding student accommodation is a priority, and that the Department of Higher Education and Training is refining a proposal to provide 300 000 new beds at public universities and TVET colleges by 2026.

Infrastructure investment

When coming to infrastructure investment, the Minister said the estimated infrastructure expenditure of R948 billion over the MTEF constitutes some 5.9% of Gross Domestic Product (GDP) over the same period.

Minister Gigaba said the lion’s share of economic infrastructure is provided by State-owned Companies (SOCs), which are projected to spend R402.9 billion over the medium term expenditure framework (MTEF).

The education sector is expected to spend R44 billion on building new schools and refurbishing existing schools, libraries and laboratories.

Municipal spending is projected to come in at R197 billion, while the provinces are anticipated to spend R208 billion.

Government is embarking on several new initiatives in infrastructure in order to improve the quality of its infrastructure spending. This includes the maintenance of existing infrastructure, improved procurement of infrastructure, improved procurement of infrastructure project, better conditional grant terms to eliminate inefficiencies and underspending.

“Cabinet has approved a budget facility for infrastructure, which aims to overcome shortcomings in planning and execution of large infrastructure projects. It has begun considering proposals in, among others, water, rail development, broadband, magistrate and high court construction and refurbishment,” said Minister Gigaba.

The budget will continue to fund the normal operations of the departments within the Justice, Crime Prevention and Security Cluster, giving effect to a priority of the Mandate Paper – the integrated operational plan to fight crime.

“However, this cluster needs to manage pressures arising from employee compensation budgets. This will require reconsideration of recruitment strategies, as well as the composition and suitability of existing staff complements,” said Minister Gigaba.

Medium term priorities include completing infrastructure projects that are underway and maintaining and rehabilitating police stations, courts, correctional facilities, and military bases and health facilities.

In addition, the new Mpumalanga High Court will open in 2018.

Over the medium term, government proposes to allocate national departments 47.6 % of available non-interest expenditure, provinces 43.2 % and local governments 9.2 %.

Minister in talks with SARS over delay in tax refunds

Finance Minister Malusi Gigaba says he is in talks with the South African Revenue Service (SARS) Commissioner Tom Moyane over concerns about tax refund delays that were forwarded to the Tax Ombudsman.

The Minister said this when he tabled the Medium Term Budget in the National Assembly on Wednesday.

“Government is aware of concerns raised by taxpayers regarding delays in refunds, and with regards to the capacity of SARS to deal with transfer pricing, increasing VAT fraud and aggressive tax structuring,” he said.

The Office of the Tax Ombud has also commented on these challenges and has made recommendations.

“I am engaging with the Commissioner of SARS on the recommendations made in August by the Tax Ombud and to take concrete and practical steps to help improve taxpayer confidence,” he said.

The Minister said, meanwhile, that the fairness and integrity of the tax system is critical for the deep social contract between government and people, and that it shapes the willingness of the people to pay their dues to the State.

He said that in that regard, it is important that government continually strengthen tax morality and deal with any underlying causes that may undermine it. This includes dealing with corruption, poor governance or those undermining or abusing the fairness of the tax system.

“While most of our taxpayers remain responsible, we are noting a slippage in compliance. SARS has enforcement powers, which are in the main punitive and this will be applied to taxpayers, who wilfully and cynically avoid paying their taxes.

“However, SARS also remains sensitive to taxpayers who are facing challenges,” Minister Gigaba said.

He said SARS was also aware of the major problem of illicit financial flows. SARS is now working closely with the Financial Intelligence Commission and the SA Reserve Bank to close loopholes.

However, the capacity of these institutions to fight crime must be enhanced, the Minister said.

“From an international perspective, the first exchanges of information under the global Common Reporting Standards took place at the end of September 2017. This information will give SARS insight into South Africans’ foreign financial accounts.

“Country-by-country reporting, which will give SARS insight into risk areas of multi-national enterprises, will begin at the end of this year (31 December 2017). The first exchanges will begin next year,” Minister Gigaba said.

Government to form task team over sale of Telkom shares

Telecommunication and Postal Services Minister Siyabonga Cwele says government will soon establish a task team to engage Telkom on the sale of a portion of its shares to address a revenue shortfall.

The Minister said this shortly after Finance Minister Malusi Gigaba tabled the Medium Term Budget Policy Statement (MTBPS), in which he announced the intention to sell a portion of the State’s shares to avoid a risk of an expenditure ceiling breach of R3.9 billion.

The expenditure breach risk was brought about by the recapitalisation of SA Airways (SAA) and the South African Post Office (SAPO) amounting to R13.7 billion.

Speaking to SAnews in Cape Town, the Minister said government decided to sell the Telkom shares instead of borrowing to fill the hole in order to maintain fiscal discipline.

“So the strategy is to use whatever money we have to cut down the debt and invest in key strategic assets - our State-owned companies. That is the approach we are taking with the Post Office, so that we continue to respect our expenditure ceiling and fiscal discipline.

“Under difficult times, you look [at] whether you should borrow or dispose of existing assets or a portion [of the assets]. As a country, we have to continue to maintain our fiscal independence and our fiscal discipline. We don’t want to send Minister Gigaba to international institutions for funding… We are basically leveraging on our existing assets. We are not privatising Telkom.

“As government, we are going to set up a task team that will engage with the management of Telkom so that we do this in a structured manner, not in a manner that may affect the share value of the investors of Telkom.”

New fund for start-ups

Meanwhile, Minister Gigaba also announced that government would set up a new fund for small business enterprise development – which will be a collaboration between the Department of Small Business Development and the Department of Science and Technology.

Reacting to the news, Small Business Development Minister Lindiwe Zulu said while it was important to work with the private sector, the new fund was separate from the R1.5 billion CEO’s Initiative that was announced recently.

“We will use our financial institutions such as the Small Enterprise Finance Agency… and the National Empowerment Fund. We will use all the existing infrastructure to make sure the money goes to the people who deserve it the most.

“The Minister said the amount will be announced soon. I am also excited because the European Union has also set up a fund for us to support SMEs… That money will also focus on start-ups and those businesses that can already see where they are going.”

National Minimum Wage Bill to be tabled in Parliament

Meanwhile, Labour Deputy Minister iNkosi Patekile Holomisa says the department will soon table the National Minimum Wage Bill before Parliament for processing.

The bill will give effect to the announcements made on the National Minimum Wage by Deputy President Cyril Ramaphosa earlier this year that were aimed at addressing wage inequality.

“I have just come out of a Cabinet Committee Meeting and it has been agreed that the National Minimum Wage Bill must be tabled in Parliament after being adopted by Cabinet next week.”