Alert 127 – South Africa’s Covid-19 supplementary budget fails to impress

On 24 June 2020, South Africa’s Finance Minister Tito Mboweni tabled an emergency supplementary budget for the 2020/21 financial year, motivated by the exigencies of the global Covid-19 pandemic and the impact of the resultant lockdown on the South African economy. In his speech accompanying the tabling of the budget, Mboweni revealed a state that is severely constrained by limited funds and a growing debt burden. The new supplementary budget included few solutions to generate additional revenue and mostly entailed reprioritising budget items in order to reallocate funds.

Mboweni said that due to the global pandemic and consequent economic effects, South Africa’s economy is forecast to contract by 7.2% of real gross domestic product (GDP) in 2020 and real GDP growth is only expected to be 2.6% in 2021, 1.5% in 2022, and 1.5% in 2023. This means that, without substantial intervention, South Africa will not recover the economic losses of 2020 for several years. Further constraining government’s response is the fact that revenue collection has shrunk in the face of growing expenses. Already the country is R35.3 billion behind on initial revenue collection targets and the South African Revenue Service (SARS) is expected to miss its initial revenue collection target of R1.43 trillion by at least R300 billion with a best-case scenario being tax collection of R1.12 trillion in 2021. This shortfall will limit the government’s ability to act and promote economic and development growth in the coming years. Further, costs are expected to exceed R2 trillion for the first time, meaning that the state will now have a budgetary shortfall of R761.7 billion (15.7% of GDP) in 2020/21. This is more than double the initially projected budget deficit in February of R370.5 billion. This will force government to borrow to cover costs leading to a notable increase in national debt. Accordingly, the National Treasury expects South Africa’s debt to grow to about R4 trillion, or 81.8 % of GDP by the end of the 2020/21 financial year. This means that for every R1 generated in tax revenue 21c will be used to finance interest on debt, making debt servicing the largest budgetary item in 2021/2022.

In the face of these dire predictions, the supplementary budget focused on reprioritising the 2020/2021 budget. Mboweni did this primarily by retrieving money allocated to programmes and expenses which were cancelled or suspended due to the coronavirus pandemic, and postponing some projects to free up further capital. This included shifting resources from provincial governments to local governments to finance basic service delivery such as water provision, essential in preventing the spread of the coronavirus. Similarly, Mboweni committed significant additional funds to the sectors at the forefront of the fight against Covid-19 such as national and provincial health departments, the South African Social Security Agency (SASSA) which pays out the emergency Covid-19 grants, as well as boosting peace and security. However, in addition to boosting the budgets of these sectors, they have also been forced to reprioritise their own budgets for 2020/21. Underscoring this is the fund to which the police and defence departments have had to reallocate R3.3 billion to support Covid-19 interventions. This money will most likely need to be taken from equipment maintenance and training which, in the long run, is unsustainable and damaging to capacity. This shifting of resources from long-term projects and needs to short-term operational expenditure will be enforced across all departments and will have a prolonged negative impact on the various departments and the country as a whole.

This reprioritising and postponing of long-term projects underscores government’s limited finances and its parallel limited ability to manouevre in the face of the growing economic crisis. Mboweni is also clearly deeply concerned about the country’s burgeoning debt which is currently forecast to exceed 100% of GDP by 2024. Mboweni dedicated a significant portion of his address to this matter and committed the state to stabilising national debt at 87.4% of GDP by 2023/2024. The only way this will be possible given South Africa’s lacklustre economic growth predictions is through drastic cost-cutting in the public sector or increasing tax revenue. To this end, Mboweni announced that the National Treasury will introduce zero-based budgeting from 2021/2022. Under this policy, government departments will need to justify annual budget items afresh every year and will be unable to receive long-term budget allocations. This will increase the National Treasury’s control of the finances of government departments and should drastically reduce state expenditure.

However, zero-budgeting is typically a tool of austerity which is conventionally accepted as a poor economic strategy during a recession and economic crisis. If South Africa curtails expenditure too much it risks limiting the much-needed state-driven economic stimulus. This will perpetuate economic stagnation. This can be avoided if the National Treasury and the Presidency work closely to prioritise expenses that drive economic growth. This has been hinted at through statements by President Cyril Ramaphosa touting a planned multi-billion Rand infrastructure programme. Should such a programme be implemented, the state will need to cut costs in other ways.

This all points to the need to reduce the public sector wage bill which absorbs the majority of state revenue every year. However, this will cause a showdown with public sector unions and increases the possibility of a major public sector strike. To do this Ramaphosa will need to use his political capital deftly and ensure he has the support of a fractured African National Congress (ANC). Similarly, the President needs to consider eliminating entire cabinet portfolios and ministries. South Africa does not need 28 ministries and almost 60 cabinet members. Yet again, this will require Ramaphosa to be willing to reduce his ability to dispense patronage through the allocation of ministerial and cabinet positions.

The supplementary budget was generally considered disappointing as it did not introduce any innovative solutions or even suggest any planned new taxes. Mboweni also declined to address controversial matters such as the revenue implications of the ongoing tobacco ban. That being said, by its nature the supplementary budget was an emergency document intended to give legal effect to the need to reallocate funds within the state to address the twin health and economic crises caused by the coronavirus pandemic. As a result, increased expectations have been raised around October’s Medium-Term Budget Policy Statement (MTBPS) by which point the Finance Ministry would have had additional time to comprehend and address the country’s economic situation and Covid-19 impacts. In addition, several of the coronavirus relief measures such as the emergency grant, tax payment delays, and financial assistance programmes will have concluded. Hence, there is a strong likelihood that the MTBPS will include further reallocation of funds, expenditure reduction, and potentially even tax increases.