South Africa’s new normal – Re-prioritising government expenditure

South Africa’s new normal – Re-prioritising government expenditure
26 Jun 2020

When Finance Minister Tito Mboweni presented the Treasury’s first budget in February of this year, South Africa’s economy was already troubled – well before the coronavirus pandemic had reached us.

Back in Parliament on Wednesday (via video conference) Mboweni presented another revenue division bill because, for the first time, the Treasury has had to deliver a supplementary budget. All of this in light of the fact that, after the first Budget, the minister already faced widespread upset due to his attempts to ‘trim some fat’.

This supplementary budget needs to cushion the country from the impact of Covid-19 – boosting and supporting incomes for the poor; limiting job losses and income support for those who do lose their jobs; and preventing the closures of mainly small and medium businesses.

The country’s official unemployment rate has now risen to 30.1% – a number likely to climb as it only covers the period prior to this pandemic gripping our country. “The figures from yesterday show that unemployment is our single greatest challenge,” Mboweni told Parliament on Wednesday.

He also said that debt continues to remain “our weakness”.

“We have accumulated far too much debt; this downturn will add more. This year, out of every rand that we pay in tax, 21 cents goes to paying the interest on our past debts. This indebtedness condemns us to ever higher interest rates. If we reduce debt, we will reduce interest rates for everyone, and we will unleash investment and growth. So today, with an eye on the future, we set out a strategy to build a bridge to recovery.”

This economic outlook is now very different for the country, which means that the Treasury has had to apply for large loans and reprioritise departments’ and government programmes.

The South African economy is now expected to shrink by 7.2% in 2020, the largest contraction in nearly 90 years. Inflation will likely register three percent in 2020. While commodity price increases and a weaker oil price have softened the blow, South Africa has a small open economy reliant on exports that have been hit hard by both the collapse in global demand, and the restrictions to economic activity.

RE-PRIORITISING GOVERNMENT EXPENDITURE

The country’s fiscal framework for 2021/22 has changed dramatically. The projected total consolidated budget spending will exceed R2 trillion for the first time. Tax revenue collected is much lower than projected – for the first two months of 2020/21 it has been R142 billion, instead of the R177.3 billion initially projected. Mboweni says the government expects to miss its tax target for this year by over R300 billion.

For help, the country has turned to the International Monetary Fund, the World Bank, African Development Bank and the BRICS partnership.

“The discussions are tough, but we think we have come to… an understanding… The IMF staff will approach their executive board in July and then the World Bank is likely to follow suit,” Mboweni told the media following his speech.

“Without external support… borrowings will almost entirely consume all of our annual domestic saving, leaving no scope for investment or borrowing by anyone else. For this reason, we need to access new sources of funding. Government intends to borrow about US$7 billion from international finance institutions to support the pandemic response. We must make no mistake, these are still borrowings. They are not a source of revenue. They must be paid back.”

In this budget, the health department and frontline services to fight Covid-19 have received a much bigger chunk. The budget proposes R21.5 billion for pandemic‐related healthcare spending and a further allocation of R12.6 billion to frontline services.

Another R5 billion is going to education to help students catch up lost school days; to provide social welfare support; and to in the creation of quarantine sites.

In addition, the country’s Economic Support Package sets aside R100 billion for a multi‐year, comprehensive response to South Africa’s unemployment concerns. Mboweni says the President’s job creation and protection initiative will be rolled out over the medium‐term and will include a repurposed public employment programme and a Presidential Youth Employment Intervention. A total of R6.1 billion has so far been allocated with a further R19.6 billion set aside.

The Unemployment Insurance Fund (UIF) has already provided R23 billion in COVID‐19 relief to over 4.7 million workers affected by the pandemic.

THE WAY FORWARD

Still of concern to the state is the public service wage bill. Nearly half of all consolidated revenue will go towards compensating public servants. While there was an expectation that Mboweni would address concerns about these individuals not getting the salary increases agreed to in 2018 – he instead mentioned Senzo Mchunu’s ongoing negotiations with labour to find a balanced solution that sets compensation at an appropriate, affordable and fair level.

THE DEBT TRAP

David Masondo, the Deputy Finance Minister, told reporters on Wednesday that the public debt has now increased to almost R4 trillion.

“We are trying to balance the public deficit which has grown and which has largely been due to SOEs (state-owned enterprises) and the public sector wage bill. Those drivers have not disappeared,” he said.

“Another mechanism is to look at our assets and liabilities. I’m afraid it has become liabilities and liabilities. Many of our SOEs have become serious liabilities.”

Masondo is in charge of implementing the Treasury’s 2020-25 Strategic Plan, which sets out the priorities and service delivery focus areas for the next five years.

On SOEs, Treasury Director-General Dondo Mogajane said between now and the Medium-Term Budget Policy Statement later this year, the government would look closely at which SOEs needed to be closed, which should be supported, and which ones should be merged. This approach might mean that bailouts of the past may disappear.

He said The Treasury was currently embarking on an expenditure review – where every function within an organisation is analysed for its needs and costs and this would ultimately help the state reach its target.

SOCIAL SAFETY NET

Another issue the government will have to consider is social grants. New grants were introduced to help the poor, while others were increased. This relief comes to an end in October, however. Some stakeholders are concerned that the economy will not have improved by this time and that these grants will have to remain in place.

Initially the government had set aside an extra R50 billion to increase grants and help those who get no assistance at all. This amount has been reduced to R40 billion.

Mboweni said the reason for this was that the “uptake for special grants has been slow, but it does not mean we are not committing”.

BUSINESS SUPPORT

Another challenge for Government will be SMMEs. While The Treasury has given banks billions of rand to help these businesses, the process has proven to be cumbersome as banks are still using old methods for credit checks, resulting in many of them not qualifying for support or the support taking too long to arrive.

Business has asked to be brought into the process to advise on how to improve the disbursement of aid to SMMEs, which the government has earmarked as key to boosting the economy and creating jobs.

The state has also identified infrastructure development and maintenance to give the economy a shot in the arm. In the Budget, The Treasury says this will include finalising electricity determinations, unbundling Eskom, taking other steps to open energy markets, modernising ports and rail infrastructure, and licensing spectrum.

There will also be a focus on supporting agriculture, tourism and other sectors with high job- creation potential.

Dondo said the SA Revenue Service would be given additional support to ensure that companies do not dodge paying tax.

This period is going to prove difficult for the government. As Mboweni said, ideally loans from international lenders should be used for investment as they must be paid back with interest. But the country at the moment needs to pump it into a “crisis” to cushion the impact of Covid-19 and the lockdown.

The virus is predicted to continue to have an impact on the country for the next 18 to 24 months, which ultimately means the “new normal” the government speaks of may also be semi-permanent.

As we progress further into our country’s response to the coronavirus pandemic, Sabinet would like to remind its userbase that we are here to support you and the work that you do. By facilitating access to up-to-date information related to all sectors of government, we aim to provide a holistic overview of the goings-on of our country and, as such, we will continue to share relevant, unbiased and, most importantly, reputable sources of information with those who need them.

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(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
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