Minister of Finance Malusi Gigaba Picture Cindy Waxa/ANA
Minister of Finance Malusi Gigaba Picture Cindy Waxa/ANA
JOHANNESBURG - Finance Minister Malusi Gigaba yesterday navigated a tight fiscal rope, announcing massive cuts in government spending while tapping into taxes to balance increasing expenditure against a dwindling revenue base.

Gigaba promised that the government would reduce its expenditure by R85billion in the next three years in a move largely seen as reaching out to the rating agencies.

However, he took everyone by surprise when he announced a one percentage point increase in Value Added Tax (VAT) to 15percent to raise R23bn and R13bn through income tax.

“The major step by government was the decision to increase VAT by one percentage point, this despite the social and political sensitivities regarding increasing VAT,” Novare economic strategist Tumisho Grater said. “These measures will contribute to reducing the Budget deficit and sends the right signals to credit rating agencies and investors that there is commitment to ensuring a sustainable path to fiscal consolidation.”

Gigaba had to work his way through a dismal outlook painted in the medium-term budget policy statement (MTBPS) last October on the country’s current and future fiscal position.

At the time, gross national debt was projected to breach 60percent of the gross domestic product (GDP) by 2022. Gigaba said most of the Budget cuts would fall on large programmes and transfers to government entities.

He said R53bn would be made at national level, adding that the Treasury had recognised the need to shift spending away from consumption towards capital investments.

“Over the past decade, the public sector has invested R2.2trillion in economic and social infrastructure,” Gigaba said. “Yet weaknesses in project preparation, execution and delivery resulted in lengthy delays and cost overruns.”

Rating agencies have raised fiscal consolidation as key elements that would determine reviews.

Moody’s, which put South Africa on a credit downgrade review in November, said it was looking for signs of further fiscal slippage.

Gigaba said the Treasury had taken the necessary decisions to avoid further downgrades.

“We have made bold and decisive steps to reduce government deficit and believe, in the short term, the measures we have undertaken will stave off any downgrades and, in the medium and long term, would see our grading ratings improve.”

The National Treasury slashed departmental baselines by R20.4bn in the 2018/19 fiscal year, R28.8bn in 2019/20 and R30.5bn in 2021/22.

The biggest casualty of the cuts was the Department of Human Settlements, whose development grant was slashed by R7.2bn in the medium term. The education infrastructure grant lost R3.6bn, while transfers to the South African National Roads Agency (Sanral), the SA Revenue Service (Sars), the Passenger Rail Agency of South Africa (Prasa) and four water boards were also cut. Allocations to the Department of Trade and Industry’s incentive development and administration programme were also decreased.

Acting head of Absa Asset Consulting, Kwaku Koranteng, said while downgrades remained possible, the improved projected fiscal position could halt them.

“Given recent political developments in the country, as well as the attempts to improve and stabilise the state-owned enterprises, the direction of the events of the past three months, including yesterday’s Budget speech, will help in avoiding another downgrade,” Koranteng said.

The Treasury said the consolidated deficit was projected to narrow from 4.3percent of the gross domestic product (GDP) in 2017/18 to 3.5percent in 2020/21.

The Treasury said in its Budget review that while the reductions in spending would cause economic discomfort, they were necessary.