The medium-term budget policy statement (MTBPS) contained a number of surprises, mostly unpleasant.
While many thought government’s tax income would come in ahead of budget this year, the situation is, in fact, dire. Government now believes it will earn a massive R27 billion less in tax than it expected.
Some R20 billion of this is due to a VAT refund shocker. Instead of paying out VAT refunds within 21 working days, as it was supposed to, SARS has been sitting on these refunds. This backlog will now be settled in a once-off payment.
Responding to questions about whether SARS in the past deliberately sat on the VAT payments to boost its own financial position, acting SARS head Mark Kingon told journalists that it was “open for debate”.
While VAT was hiked to 15% this year, which was supposed to boost government coffers, the state will now earn 20% less than it expected from VAT due to the refund payment.
Still, no additional tax increases are proposed at this time to make up for the shortfall – apart from inflationary adjustments to personal income tax brackets, levies and excise duties in February.
Earlier this year, an expert panel recommended that six products should be free from VAT to assist low-income households. These included school uniforms and nappies. Some experts expected Mboweni to announced that the six products would be VAT-free before the end of the year.
Instead, only white-bread flour and cake flour, and sanitary pads will be added to the VAT-free list, and only from April 1, 2019. This will cost the government an estimated R1 billion in VAT – compared to the estimated R6 billion if it allowed all six products to go VAT-free.
In February, government thought the economy would grow by 1.5% this year. In this budget, it lowered its expected growth rate to only 0.7% - even weaker than some local economists’ forecasts. This is also almost half last year’s growth rate.
Weak economic growth and the VAT crisis have scuppered government’s plans to lower its budget deficit. Ratings agencies probably won’t like this, and finance minister Mboweni says “honest conversations” will be had with them.
The rand slumped following the budget, and by 15:00 was down more than percent at R14.36/$.
Rand plunging on mid-term budget. Right message but numbers distressing. Budget deficit 4% vs est 3.6%. Gross debt stabilize 59.6% of GDP 2023/24. Public sector wage agreement crippling. Revenue collections R27.4bn less than expected 18/19, extends to 19/20, 20/21 budgets as well— David Shapiro (@davidshapiro61) October 24, 2018
At a media conference on Wednesday morning, Mboweni said a “reconfiguration of state-owned enterprises” could include the closure of parastatals, including SAA.
He said that South Africans should be “open minded” about what happens to SAA, citing the example of Swiss Air, which was shut by that country. If SAA in its current form is closed down, government will “invite those who know how to run a new airline” to establish a new national airline, Mboweni said. Alternatively, private equity partners may be invited to buy into parastatals, he suggested.
For now, SAA received another R5 billion to prevent a call on the airline to immediately repay outstanding debt of R16.3 billion. More than R1 billion will go to the struggling South African Express.
Mboweni also speculated that a new electricity grid could be created, without Eskom, to distribute electricity from the independent power producers. It is estimated that these producers are currently creating 61,000 jobs.
The MTBPS details grave concerns about the Road Accident Fund. Despite a 30c increase in the RAF levy that took effect this year, the fund’s liabilities are expected to almost double to R393 billion by 2022 from current levels.
“The RAF will require further large increases to the fuel levy in each of the next three years to manage the short-term liability,” Treasury says.
Government is considering long-term reforms in electricity, telecommunications, transport and logistics, the MTBPS says.
“Reviews of administered prices in other sectors such as energy are under way,” it also confirmed. It is unclear whether this would mean that electricity and even petrol prices could be determined by the private sector.
Administered transport prices will also be reviewed to reduce the cost of doing business.
No further details were given, but this could mean that fixed Transnet rail and harbour tariffs could be set free.
The finance minister got the SA defence force to assist with the “horrible situation” in the Vaal River system, which has resulted in polluted water. Sewage treatment plants around the Vaal River spill an estimated 150 megalitres of raw sewage into the water every day.
“We in Gauteng can’t drink the water from the tap anymore,” he said. “The generals in charge have already started working on solutions.”
“We have no understandable reason to have an executive of 70 ministers and deputy ministers,” Mboweni said. He believes the number of ministers should be cut, in line with the belt-tightening in the civil service.
Some 35% of all government spending goes toward civil service salaries. “No additional funding is available over the (medium term),” Treasury said. “Instead departments need to fund shortfalls by adjusting their compensation baselines. This means increasing efficiency, and carefully managing overtime and performance incentives.”
Government will spend R855 billion on infrastructure projects over the next three years, but it wants to get more private investment for these projects. As part of establishing a new Infrastructure Fund, government is planning “innovative financing mechanisms”- including subsidies – to get companies on board for infrastructure projects.
If a project is commercially sustainable, government will make it easier for private investors to invest in especially housing, telecommunication and transport projects. The private-sector development of airports was singled out by government.
If the projects are “borderline commercially viable” companies will be encouraged loan subsidies and government guarantees from the fund.
Government, banks, fund managers as well as venture capital and private equity fund representatives have formed a new body to prevent problems with infrastructure projects.
Mboweni, who was an enthusiastic director of a number of Discovery companies, says private companies could help improve the management of state hospitals.
While government remains committed to the NHI, the proposed new universal health scheme, there is a move away from the previous notion that basic services only be done by the state.
The medium-term budget does make provision to create 2,200 critical medical posts, and money was allocated to appoint medical interns who studied in Cuba and are now returning to South Africa.
It also revealed a big jump in the lawsuits against state hospitals – it is expected that this year more than R2 billion will be paid to settle claims, up R500 million from the previous year. A task team of mediation and legal experts will try to address this issue.
“There is ample scope for creditworthy municipalities with strong financial management to increase local capital investment by expanding municipal borrowing,” the MTBPS says.
“Municipalities are very cautious about long-term borrowing. Many intermediate cities and smaller municipalities with reasonably sound revenue bases are not taking advantage of long-term debt finance to invest in infrastructure.”
Government will help these municipalities to raise money on the market.
The implementation of the carbon tax will be postponed from January next year to June 1, 2019.
A tax of R120 per ton of carbon dioxide is expected to be levied. Previously, Sasol calculated that the tax would cost it R1 billion a year.
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