Takeaways from the medium term budget

Minister of Finance Pravin Gordhan delivered the Medium Term Budget Policy Statement (MTBPS) 2016 in parliament today. The presentation took place with the backdrop of student protests calling for access to free tertiary education.

Moneybags journalist Jessica Anne Wood reports on the main points highlighted in the medium term budget, which looked at funding needs of both basic and higher education and steps government is taking to address these. State-owned enterprises (SOEs) were mentioned and government’s debt deficit were addressed.

More emphasis on education

The MTBPS reveals that over the medium term, universities and students will receive an additional R17 billion.

According to the MTBPS 2016, expenditure on post-school education and training has grown faster than other budgets over the past five years. However, these funds have gone to the likes of vocational colleges, SETAs and the National Skills Fund, rather than universities.

The budget delivered earlier this year added R5.7 billion to university subsidies to fund the lack of a fee increases for the 2016 academic year. In addition, NSFAS received additional funding of R10.6 billion over the 2016 MTEF (medium term expenditure framework) period.

More funding is planned for 2017. National Treasury plans to fund the increase in fees at tertiary institutions for the 2017 academic year, up to a maximum of 8% for households earning up to R600,000 per year. NSFAS will also see increased funding.

Treasury highlights that basic education gets the biggest cut from the national budget. However, despite this, the education system is not achieving the desired results. “Priorities for government in the years ahead include expanding access to and the quality of early childhood development, overcoming institutional weaknesses in basic education, broadening access to effective vocational and technical skills, and improving the impact of resources devoted to vocational training,” says the policy document.

Today, the National Treasury and the Department of Higher Education and Training presented a united front, saying that they hear the concerns of the post-school community. They stressed that there is no room for violence and this doesn’t help the process of addressing the education funding issue.

Minister of Higher Education and Training Blade Nzimande, noted that many of the problems facing the education system at present will not be addressed by funding universities. The college sector needs to be expanded as well, with emphasis on skills development.

However, the primary focus as present, according to Minister in the Presidency Jeff Radebe, is to bring about stability at the tertiary institutions.

Health

The health sector currently accounts for 12% of public expenditure. Emphasis has been placed on using these resources efficiently. According to the MTBPS, “the public health system is realising lower pharmaceutical costs as a result of centralised tendering, market intelligence, medicine stock surveillance and new distribution systems.

The budget reveals that growth in health spending is largely due to the expansion of the HIV/AIDS programme, with particular focus on antiretroviral treatment, which now reaches 3.5 million people.

Challenges facing the health sector budget were also mentioned. The budget is under pressure “due to compensation costs, rising utilisation of public health services, higher import prices of medicines as a result of currency depreciation, and sector priorities that require additional funding,” the MTBPS highlights.

However, it is hoped that the proposed sugar-sweetened beverage tax will reduce the number of cases of non-communicable diseases associated with high sugar intake. These include heart disease, stroke and type two diabetes.

“Health promotion interventions, including primary prevention and early detection of non-communicable disease, will be implemented alongside the proposed tax,” adds the MTBPS. (For more information on sugar tax, click here)

Government and household debt

According to the International Monetary Fund’s Fiscal Monitor released in October, global debt of governments, households and non-financial firms is at an all-time high.

In South Africa, government debt exceeds R2 trillion and rising debt-service costs are driving funds away from ‘priorities’ such as infrastructure and education, the MTBPS reveals. Since 2009, a large portion of the government’s spending has been funded by borrowing.

“Low economic growth has limited government’s ability to finance its existing commitments and sustain higher levels of debt,” explains the MTBPS.

While there is no ‘magic number’ for a country’s debt to GDP ratio, Director General of National Treasury, Lungisa Fuzile highlights that this number cannot simple continue to increase. The key question is, however, what can the country afford now and going forward. Fuzile says that the debt levels need to stabilise and must not continue to rise.

Not only is the country’s debt a concern, but so too is consumer debt. It was acknowledged that consumer confidence is low, with higher inflation reducing household purchasing power. Since the first quarter of 2015, spending on durable goods has declined. In addition, credit granted to households remains subdued, with higher interest rates and stricter lending criteria discouraging borrowing. Furthermore, higher interest rates have increased pressure on discretionary spending.

State owned entities

The medium term budget further highlights that several SOEs could pose a risk to public finances. These include the likes of Eskom, the South African National Rail Agency (SANRAL), South African Airways (SAA), and the South African Post Office (SAPO).

Reforms required by SOEs, according to Treasury include changes in both finance and management. A number of key actions have been taken with the aim of stabilising these companies. However, despite an array of contingent liability risks that Treasury has put in place around the various SOEs, the budget notes that any intervention to support state-owned companies must be deficit neutral, meaning there would be no further debt.

Outlook for SA

However, despite many financial struggles facing the country, Minister Gordhan conveyed that we are not in a hopeless situation. While the current growth forecast is at 0.5%, lower than predicted in February, there are better prospects for growth in 2017.

The emphasis of the MTBPS is on measured and balanced fiscal consolidation. Gordhan highlights that the country cannot afford its old levels of expenditure with no growth to the country or economy.