South Africa’s 2020 medium-term budget in a nutshell

Finance minister Tito Mboweni has tabled the 2020 medium-term budget policy statement before parliament – revealing strained finances, with little room to manoeuvre through South Africa’s recession-hit economy.

The minister said that since the tabling of the emergency budget in June, more data has become available regarding the impact of the Covid-19 pandemic and government’s lockdown on the economy, which is  now expected to contract by 7.8% this year.

The 2021 outlook is more uncertain, he said. Current forecasts are for the South African economy to grow by 3.3% in 2021, 1.7% in 2022 and 1.5% in 2023.

Mboweni said that fiscal measures – primarily focusing reductions to the national government wage bill – will narrow the budget deficit and stabilise debt over the next five years to return the public finances to a sustainable position.

The consolidated deficit narrows from 15.7% of GDP in 2020/21 to 7.3% by 2023/24. Gross national debt is projected to stabilise at 95.3% of GDP by 2025/26, he said.

However, these projections come with some major caveats – particularly with uncertainty around the pace of economic recovery in South Africa, government’s capacity to cut spending on wages, and the ongoing demands on the fiscus by failing state-owned companies.

These are the main take-aways from the budget:

Long road to recovery

Mboweni said that South Africa will take years to get back to pre-Covid GDP levels, with a sharp 2020 Covid‐19 recession hitting first, before real GDP growth starts climbing again.

Treasury expects that real GDP growth will average 2.1% over the medium term, with output only returning to pre‐pandemic levels in 2024.

The main risks to the economic outlook are weaker‐than‐expected growth, continued deterioration in the public finances and a failure to implement structural reforms.

Mboweni also warned that a second wave of Covid‐19 infections, accompanied by new restrictions on economic activity, would have significant implications for this outlook.

The extraordinary shock to economic output in 2020/21 translates into large revenue shortfalls that will persist over the medium term.

Although overall buoyancies appear relatively large up until the end of the MTEF period, this reflects a slow improvement in the tax‐to‐GDP ratio after the large once‐off decrease in 2020/21.

The tax‐to‐GDP ratio is only expected to recover to the 2019/20 level by 2027/28.

Cutting spending

Mboweni said that government’s options to stabilise the fiscus are becoming increasingly limited.

Over the past five years, the fiscal environment has deteriorated significantly due to debt interest payments absorbing a growing share of limited public resources, underspending, and a deteriorating government balance sheet, including state‐owned companies and municipalities struggling to pay salaries and other operational costs.

To try and fix this mess, Treasury is looking to rein in spending to the tune of R300 billion over the next three years.

Relative to the 2020 Budget, main budget non‐interest spending (excluding technical adjustments) will be reduced by R60 billion in 2021/22, R90 billion in 2022/23 and R150 billion in 2023/24, with constrained spending growth in the following two years.

The largest share of reductions falls on compensation, the minister said. Other non‐interest spending items are also reduced, while funding for buildings and other fixed structures, provincial and local capital grants, and the Infrastructure Fund will be protected.

Raising taxes

To assist with the consolidation of spending, government is also looking at increased tax collection, totalling R40 billion over the next three years.

This is broken down into R5 billion in 2021/22, R10 billion in 2022/23, R10 billion in 2023/24 and R15 billion in 2024/25.

The aim is to reach a main budget primary surplus by 2025/26, Treasury said.

Tax collection is down

Tax collection will be bolstered over the period, with tax revenue expected to increase to R1.5 trillion, or 25.2 % of GDP, by the end of the MTEF period.

The gross tax revenue estimate for 2020/21, however, has been revised down by R8.7 billion compared with the projection in the June Special Adjustments Budget.

This is due to many factors affecting taxpayers and businesses this year, not limited to a significant decline in compensation, and therefore personal income tax, due to the lockdown.

Other factors include weaker import outlook, which has reduced VAT and customs expectations; a sharp reduction in consumption, lowering domestic VAT collection; and downward adjustments in specific excise duties associated with a longer-than-expected tobacco ban.

The wage bill 

Government proposes growth in the public‐service wage bill of 1.8% in the current year and average annual growth of 0.8% over the 2021 MTEF period.

Treasury said it has not implemented the third year of the 2018 wage agreement, with the matter still before the labour court – however,  government is actively engaging with labour unions to find a solution to more sustainable cost of employment.

The current Budget Guidelines propose a wage freeze for the next three years – but additional options are being explored.

Huge risks

Mboweni noted that there are significant risks to Treasury’s plans, which are not limited to the uncertainty around the speed of the economic recovery.

This includes the medium‐term effects of the lockdown, both domestically and internationally, as well as the implementation risks for expenditure reductions, particularly on the wage bill.

“Both the upcoming decision on the final year of the current wage agreement and the upcoming wage talks pose significant risks to the expenditure ceiling,” he said.

There are also big risks around additional spending pressures from state‐owned companies. Several companies, including South African Airways, are insolvent and have insufficient funds to cover operational expenses, the minister said.

SAA gets its bailout

R10.5 billion has been allocated to SAA to implement its business rescue plan.

This allocation is funded through reductions to the baselines of national  departments, public entities and conditional grants. This allocation is in  addition to the R16.4 billion allocated over the 2020 MTEF in the February  Budget for settling guaranteed debt and interest.

“Our approach is in line with the principle that funding to state-owned  companies must come from within the current framework and reprioritised from elsewhere. We cannot break the fiscal framework,” the minister said.

Read: The big hitch in Mboweni’s budget plans

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South Africa’s 2020 medium-term budget in a nutshell