The first brief in this series discussed the extent and costs of the recent unrest in universities. This brief describes the economic and fiscal context within which student and university financing has to be considered. The final brief will deal with prospects for resolution.
Decisions about the financing of universities and students will take place against an economic and fiscal backdrop which can be summarized as follows:
1. Gross Domestic Product per capita in 2016 prices has been falling since 2013.
It is expected to continue to fall until 2018 and it is not expected to reach the 2013 level by 2021.  
Source:   IMF World Economic Outlook Data Base, October 2016
The Treasury knows it, but the rest of the Cabinet seems less aware.  In circumstances like these, the emphasis should be on consolidation, pro-growth reform and special measures to alleviate the increase in poverty implied by Figure 1.
2. The share of government expenditure in GDP has risen considerably since 2000.
Government expenditure has risen from 25.2% of GDP in 2000 to 33.7% in 2016.  The IMF projects it flat from 2016 to 2021, and the October 2016 Medium Term Budget Policy Framework envisages a rise of 0.3% between 2016 and 2019[1].  New taxes to be raised in 2017/18 rise from R 15 billion in the 2016 Budget to R 28 billion in the October 2016 MTBPS. 
Source:   IMF World Economic Outlook Data Base, October 2016
3. Government net debt as a percentage of GDP fell between 2000 and 2008, but has doubled since then.  
We have been promised stabilization of the government debt to GDP ratio for a couple of years and again in the October 2016 MTBPS, but the IMF regards such a measure as unduly deflationary[2] and so projects that the ratio will continue to rise.  The IMF’s debt sustainability analysis in June 2016 concluded that the government debt to GDP ratio is sustainable in its base line assumptions, but that it has become more vulnerable to shocks.  
Source:   IMF World Economic Outlook Data Base, October 2016
4. The announcement of an R 8 billion increase for universities and an R 9 billion increase for NSFAS in the Minister’s October 2016 MTBPS speech must be interpreted carefully.
Table 1 sets out detailed information.  The items are divided into a 2016 addition and a 2017 addition section.  The 2016 additions refer to changes made between the October 2015 MTBPS and the February 2016 Budget.  They consist of:
  • a single year NSFAS historical debt relief allocation; 
  • sufficient additional funds allocated to NSFAS to see existing students through their studies; and 
  • an amount paid to the universities to compensate them for the zero per cent fee increase between 2015 and 2016.  The amount for 2016/17 is low, because most of the money came from the 2015/16 budget.
The 2017 additions refer to changes made between the February 2016 Budget and the October 2016 MTBPS.  There are two components:
  • an additional allocation to NSFAS of R 9 237 million over four years,
  • an amount to be paid to the universities of R 7 583 million over three years to fund the zero per cent fee increase for all students coming from households earning less than R 600 000 per year.
What needs to be noted is that both the R 2 563 million in respect of the zero per cent increase between 2015 and 2016, and the R 2 460 million in respect of the zero per cent increase between 2016 and 2017 will have to be paid in the 2017/18 fiscal year, coming to a total of R 5 023 million.  An inflation adjusted payment of this amount will have to be paid to universities in perpetuity.  This is to obtain an approximately 15% reduction in the fees which would have been payable by students from households with income below R 600 000 and about 8% for other students, had there not been two successive zero per cent increases.  These payments are fee replacements for universities and not increases in the block or earmarked grants given to universities.
The increases in National Student Financial Aid Scheme allocations will help to increase loans for fees and living costs for students from poorer households.  Note that the increases have to be shared between universities and TVET colleges.   
Table 1 - Additions to support universities and students, 2016/17 to 2019/20
Source:  Medium Term Budget Policy Statement, October 2016:  Table 4.4
The position with regard to the block and earmarked grants made to universities is set out in Table 2.  There has been no change between the February 2016 Budget and the October 2016 MTBPS.  
Table 2 - Block and earmarked grants
Source:  Higher Education and Training expenditure estimates, October2015 MTBPS, February 2016 Budget and October 2016 MTBPS and October 2016 MTBPS Table 2.2
Table 2 must also be interpreted carefully.  The increase from 2016/17 to 2017/18 looks generous as reported in the 2016 Budget, but the estimates include the 2016 zero per cent fee compensation payment. That removed, the increase is much smaller, as indicated in the second to bottom row in the table and it is below the GDP inflation rate.
Charles Simkins
Head of Research 

[1] National Treasury, Medium Term Budget Policy Statement, October 2016, Tables 2.2 and 3.4
[2] IMF, South Africa: staff report for the 2016 Article IV consultation, pp 17-18