The Minister of Finance, Tito Mboweni, former Governor of the Reserve bank, presented his maiden budget to parliament on 20th February. Given the background of the excesses, corruption and mismanagement of the former administration, this was a very difficult Budget to construct. Under the circumstances, he presented a positive Budget which proposed a deficit of spending over income of R243b. He addressed the problem of State Owned Enterprises (SOE’s) that are in financial difficulties and need funding as well as a management restructure. Eskom, the state power utility, has been the elephant in the room for some time and will be split into three operating companies. On-going funding will be necessary to restructure, fix design problems in some plants while keeping the power on. Everyone realises that Eskom cannot fail and must be fixed. Mboweni set out six priorities on which the Budget was based: Achieving a higher rate of economic growth Increasing tax collection Reasonable, affordable expenditure Stabilising and reducing debt Reconfiguring state-owned enterprises Managing the public sector wage bill. The highlights of the Budget are summarised below. Restructuring of state-owned enterprises (SOE’s) R23b per annum for 3 years allocated to restructure Eskom, but the government is not taking on Eskom’s debt R13b reserve established for SAA, SABC, Denel and other SOE’s Reduction of the public sector wage bill by offering early retirement to government employees aged between 55 and 59 This should reduce the wage bill by R20b over the next three years Total income estimated at R1.58 trillion and expenditure at R1.83 trillion, leaving a deficit of R243b to be funded by borrowing Total borrowings to GDP expected to rise to 56.2% in the current year and stabilise around 60% in 2023/24 Income tax brackets left unchanged, but fuel levy and “sin” taxes increased The largest increase in spending allocated to education, social grants and health GDP growth for 2019 estimated at 1.5%, revised down from 1.7% in October 2018 On the surface, the Budget is fairly bland and unexciting and is largely a stop-gap exercise pending the General Election in May and action to be taken thereafter. Two areas worth highlighting are the high level of borrowings and proposed reduction in the public wage bill. Total borrowings have risen to 56.2% of GDP, or R2 843billion. They are expected to rise further in the next few years to around 60% of GDP before stabilising. The debt servicing cost is expected to be R202.2.2b, or 12.3% of Expenditure. It would be more accurate to express the servicing cost as a percentage of Income, which would be 14.4%. This is now the fourth highest Budget expense item after Education, Social Development and Health. The Budget has set aside R23b per annum for three years to fund Eskom during the restructure process. This figure has been criticised as being far too low and could run well over R100b. It is quite possible that funding required by other SOE’s that are in financial difficulty has been under-estimated and this will also negatively impact total borrowings. The government has also committed itself to funding university students that can’t afford the current high fees. This is a new and substantial on-going commitment, expected to be R111b in the medium term. As income tax revenues are lower than forecast due to slower economic growth, any grants to students will effectively be financed by borrowings. It is clear that righting the wrongs of the past is going to increase the debt burden in the coming years. The Public Wage Bill has escalated over recent years and the public sector under the Zuma administration increased in size as it became a safe haven for friends and family of ANC members. The bill currently stands around R550b, or about 14% of GDP and has increased every year by more than CPI for at least 10 years. If these increases had led to improved efficiency and management of government departments and SOE’s then this would be justified, but just the opposite has happened. The Ramaphosa administration has realised that this cannot continue and has started to address the problem. In a very clever move, the government has offered early retirement to employees in the age group 55 to 59. They will be able to take early retirement with full benefits as if they were retiring at age 60. It is projected that 127 710 employees will opt for the package which will result in savings on the wage bill of some R20b over the next three years. The cost of R16b will be borne by the state pension fund and will not impact current expenditure. This is a clever way to help balance the books at a time when revenues are low. When viewing the State of the Nation Address and the Budget together, the government has produced a comprehensive statement of the priorities that need to be addressed to right the wrongs of the past and set the economy on the right trajectory for growth, as well as the immediate spending priorities in coming years. We now wait to see if the electorate in general and the ANC, in particular, will give Ramaphosa the required mandate in the May election to move forward. Disclaimer: The views thoughts and opinions expressed within this article are those of the author and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.