Province of KwaZulu-Natal Address by B.F. Scott � MEC for Finance

The Adjustments Estimate � 2017/18

A. Economic Review and outlook and the Fiscal Implications


Madam Speaker, honourable Members of the Provincial Legislature, colleagues, people of KwaZulu-Natal, ladies and gentlemen, last month the Honourable Finance Minister, Malusi Gigaba delivered his brutally honest maiden Medium Term Budget Policy Statement. It was clear in his candid speech that the country is faced with many challenges, which include a poor performing economy, a growing budget deficit, a projected decline in tax revenue, the threat of further credit rating downgrades and a high unemployment rate.

If these challenges are not properly managed, they could lead to South Africa sliding further into non-investment (junk) credit rating status and even seeking an International Monetary Fund (IMF) bailout.

As a country, we thus need to follow from Jackson Brown, Jr, the American author, who once said, I quote, The best preparation for tomorrow is doing your best today. Hence borrowing from his words we, therefore, need to take decisive actions and make hard choices now to ensure a better tomorrow.

Economic performance

As you may be aware, the economy of the country is expected to grow at 0.7 per cent this year, before accelerating slowly to 1.1 per cent in 2018. The subdued economic performance follows the technical recession from which the economy has since emerged, and the credit rating downgrades earlier in 2017. In KZN, economic growth is now expected at 0.5 per cent this year and 0.9 per cent in 2018 and, needless to say, this is far below the growth targets in the NDP, as well as in our PGDS.


Ladies and gentlemen, given the sluggish economic performance in the country, the debt and debt-service costs are projected to rise significantly over the next three to four years. National Treasury forecasts an increase in the debt-to-gross domestic product (GDP) ratio to 60 per cent by the 2020/21 fiscal year. This ratio was 48.3 per cent in 1993/94.

As demonstrated by the National Minister of Finance, the budget deficit would widen to 4.3 per cent of GDP in the current financial year, far higher than the target of 3.1 per cent projected in February this year.

The gross national debt is projected to reach 61 per cent of GDP by 2022, while debt-service costs will remain the fastest-growing category of public-sector expenditure over the next three years, crowding out the much needed social and economic spending.

The Medium Term Budget Policy Statement shows that the budget expenditure ceiling, as was introduced in the 2014 fiscal year, has been breached by an amount of R3.9 billion for the first time this year.

For the first time, since the 2009 global financial crisis, there is an under-collection of R50.8 billion in tax revenue. With lower economic growth and rising unemployment, which is currently at 27.7 per cent, the outlook remains challenging with regard to tax collections, negatively affecting resources available for government spending.

According to the latest data from Statistics South Africa, the number of unemployed people rose to 6.21 million in the third quarter of this year. The high unemployment rate in the country, especially among the youth, is commonly raised by credit rating agencies as a major setback to South Africa’s economic growth prospects. Needless to say, this is a ticking time bomb for our country.

It is partly this harsh reality that Minister Gigaba was candid in admitting that economic growth is a real challenge, and getting growth going will be about the only thing that can boost government’s revenue and save the country from its fiscal shortfalls and the looming downgrades by rating agencies.

As indicated by Wendell Erdman Berry, an American prolific author, I quote, We do need a new economy, but one that is founded on prudence and care, on saving and conserving, not on excess and waste. An economy based on waste is inherently and hopelessly violent, and war is its inevitable by-product. We need a peaceable economy.”

Consequences of downgrade to junk

Madam Speaker, as you may be aware, we are waiting for the Moody’s and Standard & Poor Global credit rating outcomes tomorrow (24 November 2017). The notable and material deterioration in SA’s fiscal position might result in the 90 per cent of debt issued in Rand being downgraded to non-investment grade, with potential capital outflows ensuing as a consequence.

Moody’s is the only one of the big three rating agencies to still rate SA one notch above junk. If any of these rating agencies cut their ‘local debt’ ratings, the government’s $125 billion stock of Rand-denominated debt will no longer be eligible for the Citi World Government Bond Index (WGBI).

This would lead to large amounts of capital flowing out of SA’s bond markets as investors move to anticipate the junking of SA’s domestic bonds, putting pressure on the Rand exchange rate. Currently, South Africa is the only African government bond market to be incorporated into the index.

Madam Speaker, it thus goes without saying that the fiscal path presented in the Medium Term Budget Policy Statement cannot be sustained. It is for this very same reason that the national government has set up a task team to deal with the fiscal challenges facing the country. The task team is led by the Minister of Finance and will report to the President of the country, Mr Jacob Zuma. The goal of this focused and select team is to come up with the actions needed to restore the sustainability of fiscal policy, and which will be put forward in the February 2018 budget.

Nobody trips over mountains. It is the small pebble that causes you to stumble. Pass all the pebbles in your path and you will find you have crossed the mountain � Author Unknown.

B. Proposed Adjustments

Section 31 of the PFMA determines that provinces must table an Adjustments Budget annually, and that this must be tabled within 30 days of the national Adjustments Budget being tabled. Adjustments are made to the Main Appropriation in terms of Section 31 of the PFMA. These adjustments include the appropriation of funds that have become available to the Province, the shifting of funds between and within Votes, the utilisation of savings under the main division within a Vote for the defrayment of excess expenditure under another main division within the same Vote referred to as virements, approved roll-overs for those departments who could not spend the entire amount voted by the Legislature in that particular year, to name a few.

Provincial Treasury has held various bilateral meetings with departments and public entities over the last few months to assess in-year spending patterns, as well as to discuss any spending pressures that may have arisen since the Main Budget was tabled in March 2017. Due to the tight fiscal position, the province was able to accommodate only a few additional funding requests.

B.1. Financing of the Adjustments Budget

The province continues to remain cash positive as has been the case since May 2010. Provincial Treasury continues to closely monitor the bank balances, as well as the spending pressures projected by departments in-year. The cost-cutting measures continue to be implemented with vigour. All these factors resulted in the province ending the previous year with a positive Net Financial Position and this is, therefore, the source of the bulk of the allocations being made in this Adjustments Budget.

This Adjustments Budget deals with a number of additional allocations, equitable share and conditional grant roll-overs, the movement of funds between departments, the suspension of funds from this year’s budget to be allocated back in the new financial year, as well as instances where Legislature approval is required for the change in purpose where funds were specifically and exclusively allocated, among others.

Source: Government of South Africa