South Africa to Seek Budget Spending Cuts as Debt Climbs

(Bloomberg) -- South Africa is seeking to cut government budgets as it moves to contain debt after promising billions of rands to rescue its power utility and a weak economy damps tax collection.

The National Treasury has asked departments to prepare proposals on how to reduce expenditure in a way that has the least impact on service delivery. It’s seeking cuts of 5% for 2020-21, and 6% and 7% for the next two years, the Treasury said. That could be as much as 300 billion rand ($19.7 billion) over three years.

This could be a first step in containing South Africa’s budget deficit, which is projected by Fitch Ratings Ltd. to overshoot the government’s forecast by almost 2 percentage points this year. That’s after the Treasury pledged an additional 59 billion rand bailout for the power utility Eskom Holdings SOC Ltd.

While spending cuts of that magnitude could placate credit ratings companies, Moody’s Investors Service, the last major firm to assess South Africa’s debt at investment grade, said the government’s room to maneuver in the budget is “extremely constrained” and tax increases are not off the table.

“We expect the South African government to try to absorb the extra Eskom support costs with new revenue or expenditure measures in the next mid-year budget exercise, with departmental budget cuts being one option,” Moody’s said by email when asked about the spending-reduction plans.

Finance Minister Tito Mboweni said in February the government will reduce its wage bill by about 25 billion rand over three years. This would be done by encouraging early retirement. State workers’ salaries account for about 35% of the 1.8 trillion-rand budget for the fiscal year that ends in March. Mboweni will present the mid-term budget statement with the spending framework for the next three years in October.

The government will announce plans to reduce state debt in the mid-term budget, President Cyril Ramaphosa told lawmakers on Thursday.

Johannesburg-based Business Day newspaper reported on the spending cuts earlier on Thursday.

Jackson Mthembu, the minister in the presidency, told reporters the Treasury hasn’t briefed cabinet on proposed spending cuts, adding that Mboweni would soon present an “holistic paper” on the economy.

The government’s plan to give Eskom 128 billion rand in assistance over three years will add to state liabilities and widen the fiscal shortfall. Fitch Ratings estimates the budget gap may climb to 6.3% of gross domestic product this year, and government debt to 68% of GDP in two years.

--With assistance from Paul Vecchiatto.

To contact the reporters on this story: Prinesha Naidoo in Johannesburg at pnaidoo7@bloomberg.net;Amogelang Mbatha in Johannesburg at ambatha@bloomberg.net

To contact the editors responsible for this story: Rene Vollgraaff at rvollgraaff@bloomberg.net, Gordon Bell

©2019 Bloomberg L.P.