FINANCE Minister Nhlanhla Nene has announced tough measures including tax increases, job freezes and across-the-board budget cuts to deal with low economic growth, high debt levels and lower than expected tax income.

The sale of nonstrategic state assets as well as a new funding model for state-owned enterprises (SOEs) returned to the agenda for the first time in many years.

Nene — announcing the policy shift in the medium-term budget policy statement tabled in Parliament on Wednesday — said it was "a road map to safeguard the public finances". Two years of fiscal consolidation were needed to put public finances on a more sustainable footing, he said.

"Today we face a difficult economic environment. We have reached a turning point. Fiscal consolidation can no longer be postponed," he said in his speech in the National Assembly.

The minister’s bold and disciplined approach was greeted favourably by the bond market, with the benchmark R186 strengthening by 15 basis points on the day. Lower-than-expected inflation figures contributed significantly.

While the budget policy statement is the most austere since the structural adjustments of the late 1990s, Nene said its proposals could not be characterised as "austerity". Although government spending grows more slowly than the 1.8% expected in February, it still grows at 1.3% in real terms over the next two years.

Economists welcomed the fact that cutbacks were no longer just being talked about as in the past but were embodied in the numbers. They warned of downside risks to the projections but believed the policy statement would ward off a sovereign rating downgrade in the short term.

Rand Merchant Bank fixed-income strategist Carmen Nel said it was "very encouraging" that Nene was adopting a more conservative stance and taking the risk of a credit rating downgrade seriously. "The numbers reveal a greater willingness to curtail expenditure," she said. "Certainly the financial markets will view it as favourable."

Standard Chartered Bank’s head of Africa research, Razia Khan, said there were positive surprises in the policy statement relative to the expectation that fiscal consolidation would be delayed and spending and debt would increase significantly. Instead, the budget deficit would narrow a lot faster than expected.

"Perhaps most significant of all, expectations of severe fiscal deterioration due to the state’s support of Eskom proved to be unfounded," Ms Khan said.

The government’s plan to cut back on expenditure growth and its new tax measures — to be announced in the budget in February — are expected to generate R52-billion over the next two years.

National government personnel budgets will be frozen, funding of vacancies reviewed, and the spending on nonessential goods and services such as travel, accommodation, entertainment and consultants slashed, saving about R1.3-billion in the next two years.

The government is emphatic, however, that service delivery on education, health and social protection will not suffer and that its infrastructure investment drive will remain fully on track.

However, Capital Economics assistant economist Jack Allen was not convinced that growth would reach the 3% envisaged and predicts that gross government debt will reach 50% of GDP by 2015.

These measures will allow the government to meet its budget deficit targets set in February and stabilise government debt, which the Treasury says is fast approaching unsustainable levels. But several risks remain, such as slow economic growth, the public sector wage bill and the worsening finances of state-owned companies.

"Despite weak economic growth, the fiscal proposals will enable the government to remain broadly in line with the deficit path announced in the 2014 budget, stabilising national debt at 46% of GDP in 2017-18," the Treasury said.

The budget revisions have been necessitated by lower-than-expected economic growth.

The Treasury has slashed its growth forecast to 1.4% this year from the 2.7% projected in the budget, although it expects the budget deficit to be only marginally higher, at 4.1%, from the budget projection of 4%. The deficit is forecast to fall to 3.6%, 2.6% and 2.5% over the next three years. Economic growth is forecast to be 2.5% in 2015 (budget projection: 3.2%), 2.8% in 2016 (budget projection: 3.5%) and 3% in 2017.

However, Capital Economics assistant economist Jack Allen was not convinced that growth would reach the 3% envisaged and predicts that gross government debt will reach 50% of GDP by 2015.

In a bid to reduce spending, the expenditure ceiling will be lowered by R25-billion over the next two years for the first time. The gross tax revenue shortfall of R61-billion over three years — R10-billion lower this year — relative to forecasts will be offset by the additional R44-billion government is looking to raise from its new tax measures.

Nene said the tax measures to be announced in the 2015-16 budget would be designed "to limit as far as possible any negative impact on growth and job creation". They would be based on the proposals to come from the tax committee headed by Judge Dennis Davis.

It is likely that wealth taxes such as estate duty and capital gains tax will come under the Treasury’s spotlight.

Public-sector workers have been warned that retrenchments loom if they insist on higher wage increases than inflation. The Treasury emphasised that restraining the growth of the government’s wage bill was an important part of the fiscal rebalancing that is required.

It has provided for an annual 6.6% increase in the wage bill over the next three years. This is sharply lower than the 15% that public-sector trade unions are demanding.

"Any departure from the path of consumer price index-linked cost-of-living adjustments will require either a reallocation of resources from other spending areas or prompt a need to reduce government employment," the Treasury said.

Total expenditure in 2014-15 is projected to be R6-billion less than the budget estimate after taking into account the unallocated reserve, savings and underspending.

An unallocated reserve of R45-billion in 2017-18 has been provided for in the plans "to serve as a buffer against economic and fiscal shocks".

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