No cheer except for SAA as Tito Mboweni delivers spending cuts, public wage freeze and signals tax hikes

28 Oct 2020

SAA has got its R10.5-billion to stay in the air, and hard-pressed South Africans tax increases totalling R5-billion in 2021. In a politically unpopular move, civil servants face an effective public wage freeze. Wednesday’s Medium-Term Budget Policy Statement was every bit as grim as expected – and worse.

SAA got its bailout billions as just about every national department shaved off millions from its allocations. The police contributed R1.651-million, Home Affairs R98.311-million, International Relations R28.65-million and Government Communications and Information Systems (GCIS) R5.9-billion, according to the Adjusted Estimates of National Expenditure. And so it went.

Indication that SAA would get its bailout billions came last week when Public Enterprises Minister Pravin Gordhan told Political Currency that Cabinet had come to an agreement on what he styled as support for workers retrenchments, suppliers and plane lessors.

Wednesday’s Medium-Term Budget Policy Statement (MTBPS) confirmed this, setting months of controversy within Cabinet almost from the start in December 2019 when SAA was put into business rescue. In January 2020 the governing ANC lekgotla decided that SAA be restructured, but retained as national flag carrier.

That government found R10.5-billion for SAA at a time of at best muted economic prospects – South Africa would return to 2019 levels only in 2024, according to MTPBS – is a sign of how ideological and political decisions impact on the domestic economy.

Some would have pointed out how the numbers, despite the threat of a debt spiral, have remained stable since the June emergency Covid-19 Budget, or South Africa’s first-ever Special Appropriation Budget. Total debt is R4-trillion, the Budget deficit at 15.7%, or R761.1-billion, and gross debt at 81.8% of gross domestic product (GDP) in 2020, going up to 95.3% in 2025. South Africa’s economy is contracting 7.8% in 2020, slightly worse than the 7.2% June forecast. Tax collection is down R312.8-billion from what was estimated in February, a deterioration from the R304.1-billion short of target in June.

And politically, the Cabinet trade-off for the SAA financing, a defeat for Finance Minister Tito Mboweni, is found not only in the ministerial agreement to what effectively is a politically unpopular public sector wage freeze.

2020 MTBPS Speech

According to the MTBPS, it was “essential” for government’s fiscal sustainability that public wage increases had to be kept to 0.8% over the next three years.

“(T)he Budget Guidelines propose a wage freeze for the next three years to support fiscal consolidation,” said the MTBPS, adding this could include harmonising public servants allowances and benefits, and reconsidering pay progression.

The MTPBS minces no words about the impact of the public wage bill for some 1.3 million civil servants. Because the head count had largely remained unchanged over the past five years, according to Annexure B of the MTBPS, “inflation and real increases in remuneration account for over 96% of the increase in spending”.

And the public wage bill accounted for around 40% of total government expenditure, or R567-billion in salaries in the 2019/20 financial year.

But governing ANC alliance partner Cosatu, and other labour federations, are likely to reject this amid a groundswell of criticism of neoliberal austerity measures.

One of Cosatu’s largest affiliates, the National Education Health and Allied Workers’ Union (Nehawu), has successfully clinched salary increases of 6.1% for its members at Parliament and the provincial legislatures. A similar wage deal was done at the National Student Financial Aid Scheme (NSFAS).

Nehawu vowed war after government failed to implement the last of the 2018 three-year wage deal in 2020, saving R36.5-billion. The legal battle over this wage freeze starts in the court in early December. Still, government hopes for a settlement seemingly hoping to persuade labour to take the pain – for the greater public good.

But further tough decisions are pending – all to close that gap between expenditure and income. This includes “no further recapitalisation of state-owned enterprises (SOEs)” . Other decisions are subject to high-level discussions on, for example, reconsidering “approaches to providing financial support to students in post-school education”, urban transport subsidies and housing delivery, to “the number and size of departments, ministries and public entities”.

Coincidentally, the Zondo State Capture commission is one of the few beneficiaries as it is allocated another R63-million.

Wednesday’s MTBPS does not mince its words around South Africa’s biggest economic risk – debt. Dealing with that was central to economic reconstruction and recovery that’s anchored on infrastructure spending.

The MTBPS reiterated the June Special Appropriation Budget blunt statement that 21 cents in every tax rand is spent on debt, adding: “Debt service costs are the fastest-growing item of spending.”

At R225.9-billion in 2020/21, debt service costs are just a little short of the revised R226.2-billon Health spending. By 2023/24 debt service costs are expected to rise to R353.1-billion. That’s an increase of 12.9% to 18.3% of expenditure over that same period.

Or as the MTBPS put it: “Failure to address the deterioration in the fiscal position could lead to a sovereign debt default, which would result in a reversal of man gains of the democratic era.”

To start dealing with the looming debt trap, the MTBPS proposes “tax increases of R5-billion in 2021/22” – details of tax measures are only announced in the February Budget – alongside the public wage chill, that would also include early retirement savings of R227-million over two years.

But expenditure cuts of R306.7-billion must be found over the next three years.

Like the public wage bill, provinces and local government are key to these expenditure cuts. Provinces will have transfers cut by R60-billion before 31 March 2021, R85.6-billion in the 2021/22 financial year, and R64.1-billion in 2022/23. Local government, where wages increased by 6.3%, gets R17.7-billion less in the 2020/21 financial year. More details would emerge in the 2021 Budget.

Like the departmental scrounging to find the SAA bailout billions, finding cuts is a painstaking accumulation across departments, grants, transfers and so on. It would include, for example, the R13.8-million rolled over for an e-Cabinet system, or the R83,000 saved by salary deductions of the president and his deputy.

But even with these cuts, and in expectation of a successful public wage freeze that’s far from certain given labour threats of militancy, South Africa’s prospects remain grim.

Failure to implement structural reforms, weaker-than-expected economic growth, continued deterioration in public finances and the consequences of the Covid-19 hard lockdown are central. Against this, “a second wave of Covid-19 infections, accompanied by new restrictions on economic activity, would have significant implications for the outlook”.

That’s polite finance-speak for: it’s set to get worse. DM

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