It is impossible to overstate just what a disaster the new bailout for Eskom is for SA’s public finances — not to mention the public psyche. Despair is setting in at the size of the fiscal mountain SA must climb and the alarming absence of a detailed strategy to return Eskom and other bankrupt state-owned enterprises (SOEs) to financial viability.
Promises by previous finance ministers that in future SOEs would be financed in a “deficit-neutral” manner, through the sale of state assets and cash injections from strategic equity partners, were wishful thinking.
The latest R60bn for Eskom will blow SA’s debt and deficit targets clean out of the water and be financed almost entirely through additional borrowing. Finance minister Tito Mboweni admitted as much in tabling the bailout request last week when he said: “The fiscal support we are announcing today will come at a significant cost to the fiscus and to SA taxpayers.”
At least we are now being honest with one another. However, it doesn’t mean steep tax hikes are inevitable. After many years of personal income tax increases, coupled with serial growth disappointments and declining tax buoyancy, the Treasury knows there is little room to raise the tax burden further without it being self-defeating from a growth perspective.
The biggest bullet in the tax arsenal is a VAT hike. But the one percentage point hike in VAT in 2018 delivered only about R22bn in extra revenue. Mboweni needs R128bn over the next three years just for Eskom. Anyway, given the furious public backlash and negative impact on the poor, further VAT hikes must be off the table.
If you thought VAT hikes were being held in reserve to fund National Health Insurance (NHI), think again. There is no fiscal room. Not for NHI, nor anything else. Anyone who thinks otherwise doesn’t understand the fiscal implications of Eskom.
All successful fiscal turnarounds typically involve cutting state spending as a share of GDP. Yet the SA budget allows for expenditure to grow 2.4% faster than inflation on average over the medium term, which is completely out of whack with an economy that is battling to grow at a mere 1%.
Ideally, the government should sell some assets and cut expenditure in tandem. This would reduce the extra borrowing required and send out a message that SA is serious about restoring fiscal sustainability.
The obvious place to cut is the civil service, which, at roughly 1.3-million people, is one of the best compensated (relative to GDP) in the world. It is also one of the most inefficient — Eskom being a case in point.
But there is no political space for President Cyril Ramaphosa to consider mass retrenchments, let alone cuts to social services in a country where 27% are unemployed and over 30% live in poverty. And he has already promised that Eskom’s restructuring will not lead to job losses. (Wishful thinking, again.)
So, given the political constraints, SA’s only real option is to increase borrowing, which will accelerate debt rapidly towards 60% of GDP, undoing our previous fiscal consolidation efforts. SA’s debt ratio is 56%. Our BB peer category median is 44.6%. But the really scary thing is that our peer country median growth rate is 3.4%, whereas SA will be lucky to grow by more than 0.5% this year.
Every year that SA experiences low growth it becomes harder to effect a turnaround; every time we raise borrowing, the mountain back to fiscal sustainability becomes higher to climb.
At this rate SA will find itself at the IMF within a few years. The fund will force the politicians to enact the austerity measures they should have started years ago. But the IMF is hardly a risk-free solution given that its prescripts can cause misery that fans populist responses. So how SA deals with its fiscal crisis today is of the utmost importance if the country is to avoid a complete unravelling further down the line.
• Bisseker is a Financial Mail assistant editor.
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