Finance Minister Nhlanhla Nene held the fiscal- consolidation line in his sobering maiden Medium-Term Budget Policy Statement (MTBPS) address last week. The Minister said the country had reached a “turning point”, whereby revenue was insufficient to cover expenditure, while debt levels were approaching the limit to what was sustainable

For this reason, a R25-billion lowering of the expenditure ceiling was announced, together with plans to raise an additional R27-billion through higher taxes in the coming two years.

The two initiatives represented the main components of a five- part ‘fiscal package’ designed to narrow the deficit and stabilise debt. The other three elements included:

• strengthening Budget preparation to emphasise longer-term planning and efficient resource allocation;
• freezing government personnel headcounts and reviewing funded vacancies; and
• adopting a deficit-neutral approach to financing State-owned companies.

With the unveiling of the package, Nene was able to sustain the deficit promises made in February by his predecessor, Pravin Gordhan, with the MTBPS forecasting the 2014/15 deficit at 4.1% of gross domestic product (GDP).

The figure was better than many had been expecting, with a number of commentators having expected that it could slip to levels of worse than 4.5%. The deficit was projected to fall to 3.6% in 2015/16, 2.6% in 2016/17 and to 2.5% in 2017/18.

The 2014/15 projection was sustained despite a downward revision in gross tax revenue for the year, with collections expected to come in at R956-billion in 2014/15 – that would be R153.2-billion less than budgeted expenditure of nearly R1.14-trillion.

Nene dismissed assertions that it was an “austerity” package, however, noting that expenditure would continue to grow in real terms by 1.8% a year. Nevertheless, he acknowledged that the pace of expansion would slow materially, which would cause some pain.

To facilitate a “structural increase in revenues”, tax policy and administrative reforms would also be pursued to raise at least R12-billion in 2015/16, R15-billion in 2016/17 and R17-billion in 2017/18. Details, Nene said, would be announced in the February Budget, with deliberations on the possible changes to be guided by the Davis Tax Committee, which is led by Judge Dennis Davis.

The short- and long-term implications of the tax proposals for economic growth and job creation would be a key consideration, with the National Treasury lowering its economic growth forecast to 1.4%, from 2.7% in February. It was also forecasting growth of only 2.5% in 2015, 2.8% in 2016 and 3% in 2017, which was well below the 5% aspiration set out in the National Development Plan.

But there was a warning that even this modest growth outlook faced several domestic and external downside risks, ranging from further delays to dealing with the country’s electricity shortages through to a hostile labour relations climate and the vulnerability of the twin-deficit economy to a slowdown in financial flows.