Insights category - Markets economy
Markets & economy

2020 Budget: Managing the wage bill and fixing Eskom's credibility

The National Treasury faces formidable challenges in preparing the Budget for the 2020/21 fiscal year, which will be presented on 26 February. Projections tabled in the Medium-Term Budget Policy Statement (MTBPS) in October 2019 suggest that the fiscal deficit is heading towards 6.5% of GDP. The immediate problem has been caused by the effective bankruptcy of Eskom and certain other parastatals. This has triggered a crisis caused by a decade of unsustainably large increases in the public wage bill.

There is limited scope to further increase taxes. Despite a weak economy, tax collections as a percentage of GDP are close to record levels. Any attempt to further increase taxes could have the unintended adverse consequence of further reducing consumer spending and perpetuating our current economic malaise. A VAT increase is politically unpalatable and increasing personal tax rates will not significantly increase collections, if only because it will accelerate the emigration of taxpayers. Beyond the normal increase in revenue which arises if personal income tax brackets are not adjusted to compensate for inflation and increased levies on petrol, tobacco and alcohol, there is not much that can be done to boost government revenues. Accordingly bringing the exploding deficit under control requires a reduction in the growth in expenditure.

The public wage bill must be managed so that it does not grow faster than inflation. Parastatals must be restored to solvency. Funding Eskom is a formidable challenge. Although there are numerous schemes as to how the funds required can be raised, these are irrelevant until the new management can create a well-functioning organisation, which will command confidence within financial markets. In the interim the burden of funding Eskom will fall on the State. Accordingly, the key objective of this budget should be to table a plausible plan to manage the wage bill and interim funding for Eskom.

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