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Medium-Term Budget: A sobering but realistic update

Yesterday, the Minister of Finance, Tito Mboweni presented his second Medium Term Budget Policy Statement (MTBPS) since taking office on 9 October 2018.

Kevin Lings

Kevin Lings

Chief Economist


Kevin joined then-Liberty Asset Management as an economic analyst in 2001. As STANLIB’s Chief Economist, he is responsible for domestic and global economic research and forecasts. Kevin also provides input into STANLIB’s asset allocation processes and provides relevant economic research for our Fixed Income, Property and Equity teams.


Yesterday, the Minister of Finance, Tito Mboweni presented his second Medium Term Budget Policy Statement (MTBPS) since taking office on 9 October 2018. The Minister presented a sobering but realistic update of SA’s fiscal parameters, with clear evidence of a further sharp deterioration in government’s fiscal position. The weak economic environment, a further revenue shortfall and the additional funding requirements by SOEs meant National Treasury was always going to have to report further fiscal slippage. However, the extent of slippage announced by Minister Mboweni today exceeded most analysts’ expectations. Unsurprisingly, the rand weakened, and bond yields rose.



Three years ago, the MTBPS projected that by 2019/2020:

  • government revenue would reach R1.67 trillion,
  • the budget deficit would improve to a mere -2.5% of GDP,
  • gross debt would total R2.87 trillion or 52.3% of GDP, and
  • SA’s real annual GDP growth would exceed 2%.

Fast forward three years, and the reality is alarmingly different. According to the Minister of Finance:

  • government revenue is now projected at only R1.53 trillion in 2019/2020, which is R52.5 billion less than what was budgeted as recently as February 2019 and a massive R133 billion below what was envisaged three years ago
  • Similarly, the budget deficit has risen to -5.9% of GDP as the growth in government expenditure has outpaced the growth in tax revenue,
  • gross debt has jumped to a record R3.167 trillion, which equates to 60.8% of GDP, and
  • SA’s GDP is expected to grow at only around 0.5%.

In simple terms, the government has borrowed a staggering R297 billion more than it forecast just three years ago. And that is without solving any of the looming debt issues within the major State-Owned Enterprises (SOEs).

This sustained deterioration in SA’s fiscal position, which has been more pronounced this year, largely reflects the combined effect of three major constraints that are still not attracting the appropriate level of urgency and political will to resolve.



Tax revenue has fallen

South Africa’s tax revenue has fallen well behind budget for the fifth consecutive year, hurt by weaker than expected economic growth, a systematic decline in tax morality as a result of higher levels of corruption, and a deterioration in the institutional capacity of the South African Revenue Service.



The Minister acknowledged that in 2019/2020 there is an estimated tax revenue shortfall of R52.5 billion, which is fairly widespread, including a R25 billion under-collection of personal income tax, a R12 billion shortfall in VAT receipts and a R10 billion underperformance of corporates taxes. The Minister also revised down government revenue by a further R84 billion in 2020/21 and a staggering R114.7 billion in 2021/2022.



It is abundantly clear that without a sustained increase in economic growth that is accompanied by an increase in employment as well as an improvement in revenue collection and tax morality, the government is going to continue to struggle to meet its revenue targets. Without higher economic growth, tax collection will continue to dwindle, scuppering government attempts to meet its socio-economic objectives.


SOEs require additional finance

The second constraint is that the government has had to provide many of the SOEs with significant additional finance. For example, in the February 2019 National Budget the Minister of Finance indicated that government would transfer an additional R23 billion to Eskom each year for the next ten years to support its balance sheet. Shortly after the National Budget was released, the authorities acknowledged that Eskom would require much more financial support. Consequently, government decided to allocate an additional R26 billion to Eskom in 2019 and a further R33 billion in 2020. This has been expanded to include a further R10 billion in 2021. These bail-outs together with the under-performance of other SOEs have contributed substantially to the acceleration in government debt. There is a real risk that the SOEs will require additional funding in the years ahead unless more meaningful measures are adopted to restructure the key public corporations.



Inefficient Government expenditure

The third constraint is the inefficiency of government spending. A few years ago, National Treasury introduced an Expenditure Ceiling in an effort to control government spending and restore fiscal discipline over the medium term. In general, the results of this initiative have been encouraging. However, the split between consumption and capital expenditure remains hugely problematic. Over the past ten years, government has tended to increase consumption expenditure at the expense of capital projects. This clearly undermines economic growth over the longer term and is leading to the deterioration of many vital areas of service delivery, including water, healthcare and education. 



Furthermore, the efficiency of spending has deteriorated significantly, with the Auditor-General reporting a significant increase in wasteful and unauthorised expenditure in recent years. This, coupled with high levels of corruption, massively undermines the effectiveness of government services, negatively impacting confidence. Encouragingly, in the MTBPS the Minister announced a range of initiatives to start to more effectively control government’s spending on salaries. While this is a step in the right direction, it is not nearly enough to restore fiscal discipline.



The achievement of a number of ambitious projects planned by our government, for example National Health Insurance is going to become increasingly problematic without a substantial increase in tax revenue and an improvement in the efficiency of government expenditure. In 2016, Minister Pravin Gordhan made the point that “the quality of government spending needs to be improved. Too much public spending is regarded as wasteful, too much is ineffectively targeted and too little represents value for money.” Furthermore, Minister Gordhan stressed that “fiscal resources do not match long-term policy aspirations”. Since then, government’s policy aspiration has grown, while the fiscal resources have deteriorated significantly, limiting government’s ability to close the gap between policy intention and enactment.



As a result of these three constraints, government debt has risen from a low of 26% of GDP in 2009 (at the time Moody’s had assigned SA an ‘A’ credit rating), to an estimated 60.8% of GDP in 2019/2020 and it is expected to rise to over 70% of GDP within the next three years. This means that, in value terms, over the past three fiscal years government debt will have risen by a massive R934 billion, which is equivalent to R25.9 billion a month, or an average of around R1.1 billion each working day.



This increase in debt is especially damning when you consider the deterioration in SA’s socio-economic conditions, especially sustained low economic growth, record high unemployment, a record low savings rate, systematic downward revisions to the credit rating, regular electricity outages, a fragile water supply, the deterioration in public sector health, and poor education outcomes.




Overall, this year’s MTBPS provided a sobering but realistic assessment of government finances, especially the rapid and unmitigated deterioration in key fiscal parameters during recent years, but more importantly the likely continued further deterioration and looming fiscal debt trap and further credit rating downgrades unless very significant changes occur. Ultimately, there is no substitute for higher economic growth in resolving SA’s unfolding fiscal crisis. Furthermore, this can only be achieved through a concerted and co-ordinated effort to lift business and household confidence to improve private sector fixed investment, skills development and productivity.

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