The emergency budget in a nutshell

 ·24 Jun 2020

Finance minister Tito Mboweni has delivered his emergency supplementary budget, outlining government’s financial response to the Covid-19 pandemic.

According to the minister, the Covid‐19 crisis has turned the global economy upside down, noting that in the February Budget, it was expected that the global economy would expand by 3.3% in 2020 – now the expectation is that there will be a global contraction of 5.2%.

“This will bring about the broadest collapse in per capita incomes since 1870. Throughout the world, tens of millions of workers have lost their jobs. South African unemployment increased by one percentage point, reaching 30.1 per cent in the first three months of this year,” he said.

“The South African economy is now expected to contract by 7.2% in 2020. This is the largest contraction in nearly 90 years.

“Inflation will likely register 3% in 2020, in line with the outcome of this morning. Commodity price increases and a weaker oil price have softened the blow, but as a small open economy reliant on exports we have been hit hard by both the collapse in global demand and the restrictions to economic activity,” the minister said.

To counteract the effect of the crisis, Mboweni said that the South African government has responded with an “unprecedented set of measures”.

These measures and the state of the economy are outlined below.

Main budget changes

The major revisions in the budget see most of the reductions happening in learning and culture, and to the benefit of social development.

Spending was adjusted by removing funds underspent due to delays caused by the lockdown from the baselines of affected departments; suspending allocations for capital and other departmental projects that could be delayed or rescheduled to 2021/22 or later; and suspending allocations to programmes with a history of poor performance and/or slow spending.

Net in-year suspensions of spending amounting to R100.9 billion have been implemented for national departments, provinces and local government.

Further suspensions may be announced in the October 2020 Medium Term Budget Policy Statement (MTBPS). Provinces will reallocate at least R20 billion to the Covid-19 response in their own budgets.

R500 billion support

The Covid-19 fiscal package identifies R500 billion in economic relief.

It includes:

  • R190 billion in main budget spending – of which R145 billion is allocated immediately – to protect lives and support livelihoods,
  • R70 billion in tax policy measures and
  • A R200 billion loan guarantee scheme to support short-term economic activity.

According to Mboweni, projected total consolidated budget spending, including debt service costs, will exceed R2 trillion for the first time ever, including R145 billion added to the budget as part of the Covid-19 response.

Tax collection is way down

Gross tax revenue collected during the first two months of 2020/21 was R142 billion, compared to the initial forecast for the same period of R177.3 billion.

“Put another way – we are already R35.3 billion behind on our 2020/21 target,” Mboweni said.

As a consequence, gross tax revenue for the 2020/21 fiscal year has been revised down from R1.43 trillion to R1.12 trillion.

That means that South Africa expects to miss its tax target for this year by over R300 billion.

“Taken together the measures and adjustments we present translate into a consolidated budget deficit of R761.7 billion or 15.7% of GDP in 2020/21. This is compared to the deficit of R370.5 billion, or 6.8% of GDP projected in February.

The main issued identified include:

  • Personal income taxes are under significant pressure resulting from job losses, labour unavailability and employers’ inability to pay full salaries. Salaries and wages will remain volatile through the recovery period.
  • Corporate tax collections will be negatively affected by service and production closures during the lockdown, uncertainty concerning the pace at which normal activity can resume, and weak business and consumer sentiment. Companies of all sizes will be affected.
  • Value-added tax (VAT) and customs revenue estimates have been revised down in response to lower confidence, lockdown-related sales restrictions and a much weaker trade outlook.

Debt is growing out of control

Early projections show that gross national debt will be close to R4 trillion, or 81.8% of GDP by the end of this fiscal year. This is compared to an estimate of R3.56 trillion or 65.6% of GDP projected in February, Mboweni said.

Debt-service costs will increase from R204.8 billion in 2019/20 to R236.4 billion in 2020/21, or from 4% of GDP to 4.9% of GDP.

Debt-service costs are expected to reach R301.1 billion, or 5.4% of GDP, in 2022/23.

“Without adopting the active approach outlined above, debt will quickly spiral beyond 140% of GDP. Over the next several months, the government will clarify the adjustments required to narrow the deficit and stabilise debt,” Treasury said.

Zero-based budgeting

Mboweni said that the Medium Term Expenditure Framework process will be guided by the principles of zero‐based budgeting.

“This means that we will try to reduce all expenditure that we thought we can no longer afford. After all, we are not as rich as we were ten years ago. The upcoming MTEF will pilot this approach,” he said.

The minister gave the example of Eskom as a basis for the policy of zero-based budgeting, saying that government has previously given money to bail out the group on the assumption that its electricity and power plans would be executed.

“The principle of zero‐based budgeting is that we must see demonstrable value for money,” he said. “Eskom will need to show progress in meeting the milestones as laid down in the roadmap. This is non‐negotiable.”

Tax measures are coming

The minister said that South Africa needs to find spending adjustments of about R230 billion over the next two years. Tax measures of R40 billion over the next four years will also be required.

This translates to tax increases of R5 billion in 2021/22, R10 billion in 2022/23, R10 billion in 2023/24 and R15 billion in 2024/25.

“The government will announce details to these tax proposals in the 2021 Budget,” he said.

Public wage bill gets a skip – for now

Mboweni did not announce any new measures around the public wage bill, except to say that minister Senzo Mchunu is “negotiating” with labour to find a balanced solution on fair pay in the sector.

The minister said that government is still committed to the R160.2 billion reduction in public sector wages over the next three years, as announced in February.

“The 2021 MTEF will assume necessary revisions to the public-service wage bill,” he said.

Read: These graphs show how difficult Mboweni’s coronavirus budget task will be

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