South Africa can expect a deep recession this year – as bad as any in the last 90 years.
Finance Minister Tito Mboweni delivered his Supplementary Budget Speech 2020 to (a virtual) Parliament yesterday (June 24).
Lullu Krugel chief economist for PwC Strategy&, and Dr Christie Viljoen, PwC Strategy& economist, unpack the budget.
Against the backdrop of a pandemic and deepening economic recession, the minister released adjustments to the February budget numbers, also promising a second round of adjustments in October alongside the Medium‐Term Budget Policy Statement (MTBPS).
A deep recession in 2020
The National Treasury expects the economy to contract by 7.2% this year – PwC’s scenarios range from 8,3% to 10,6%. Irrespective of the eventual number, the economic recession will be deep – the worst in 90 years.
In support of the economy, Mboweni again highlighted the government’s R500-billion economic support package. PwC’s earlier calculations show that only about R192-million of this is “new” money, with the rest being redirected expenditure or financial guarantees.
While the country’s economic outlook is heavily influenced by trends in the global economy, the Supplementary Budget Review 2020 warned that domestic fiscal policy measures and implementation of economic reforms over the next six to 12 months will determine South Africa’s growth trajectory over the next several years. Absent these scenarios, there will be prolonged weakness in economic growth.
This weakened economic environment will, of course, result in additional pressure on already-struggling state-owned enterprises (SOEs). This makes the need for broad-based reforms at SOEs even more urgent than before to make these entities more efficient and financially sustainable. This would include reducing the number of SOEs, incorporating certain of their functions into central government, seeking equity partnerships, and ensuring stronger policy certainty and implementation.
Planned financial transfers from the fiscus to SOEs will be strictly conditional on improving their balance sheets. There were no specific references in the Supplementary Budget Review 2020 to South African Airways and very little about Eskom as well.
R300-billion less in government revenue
During the first two months of the fiscal year, tax revenues totalled R142-billion compared to a February forecast of R177-billion.
Based on these collections and the economic outlook for the remainder of the period, the National Treasury now expects gross tax revenues of only R1,12-trillion in the 2020/2020 financial year.
That is more than R300-billion less than planned for just four months ago. This includes previously announced R26-billion in tax relief and R44-billion deferred due to delays in tax collection.
A R145-billion spending response to the pandemic
The government plans to allocate R1,57-trillion to non-interest expenditure in the 2020/2021 financial year. This is R36-billion more than planned during February.
While the supplementary budget plans to save more than R100-billon, for example by reducing national departments’ baseline budgets and suspending some provincial and local government conditional grants, it has also added R145-billion in additional fiscal response to the pandemic.
Notable new expenditure points include:
* A temporary Covid‐19 grant to more than 18-million South Africans;
* Special Relief of Distress grant for 1,5-million adults without income;
* An additional allocation of R25,5-billion to the Department of Social Development for a total social relief package of R41-billion;
* R21,5-billion for Covid‐19‐related health care spending;
* R12,6-billion to services at the frontline of the pandemic response;
* An additional R19,6-billion for the repurposed public employment programme.
Budget deficit more than doubles
The balance of the smaller revenue pool and increased expenditure will translate into a budget deficit of R761,7-billion, equal to 15,7% of GDP. This is more than double the 6,8% of GDP figure released in February.
To finance this, the National Treasury has revised it borrowing strategy, planning for increase borrowing and the issuance of shorter-dated bonds. More than R300-billion in additional domestic bond sales (compared to February plans ) and an extra R96-billion in international borrowing is now factored into this started.
Debt ‘is our weakness’
“[D]ebt is our weakness. We have accumulated far too much debt; this downturn will add more,” commented Mboweni in his speech. Current projections see gross public debt increasing to an equivalent 81,8% of GDP this year compared to 65.6% of GDP projected in February.
However, the minister pledged that the government will narrow the fiscal deficit and stabilise debt at 87,4% of GDP in 2023/24.
Accordingly, the MTBPS is set to be drafted on a zero-based budgeting process, i.e. starting from scratch, to achieve this. Downward spending adjustments of R23-billon will also be required in the next two years.
Reigniting the economic growth flame
The Supplementary Budget Review 2020 reported that the government envisions a package of economic reforms “that will improve productivity, lower costs and reduce demands of state-owned companies on the public purse”. These measures will include:
* Unbundling Eskom and taking other steps to open up energy markets;
* Modernising ports and rail infrastructure;
* Licensing mobile spectrum;
* Lowering the cost of doing business;
* Reducing red tape;
* Improving access to development finance for small, medium and micro enterprises (SMMEs);
* Support for agriculture, tourism and other sectors with high job creation potential;
* Facilitating regional trade; and
* Reducing the skills deficit by attracting skilled immigrants.
Admittedly, none of these plans are new, and would be familiar to anyone who has read the ‘Economic transformation, inclusive growth, and competitiveness: Towards an Economic Strategy for South Africa’ paper.
The document has been around since August of last year and has not received overwhelming support (or implementation) within national government.
This raises strong questions as to the ability of the state to reform the economy out of its recession, and in turn the ability to reduce the fiscal deficit and stabilise public debt.