Finance Minister Tito Mboweni will deliver the emergency budget on Wednesday and what is clear is the need for great sacrifices as the country faces a significant revenue shortfall.
Mboweni himself has said on two separate occasions in parliament that the country no longer has the resources it did in the past and the government therefore needs to adjust its spending expectations.
A snippet of this “poorer” position was revealed in a Facebook post on Friday in which Mboweni shared several slides from a presentation made at the National Economic Development and Labour Council (Nedlac).
We were at NEDLAC yesterday, June 19, 2020, for a conversation with social partners on the upcoming Supplementary…
The presentation showed that the budget deficit would widen to 14%, double the figure forecast in February. Mboweni also outlined a marked increase in the government’s gross debt-to-GDP ratio, putting it at just under 80% in 2020/2021 from an initial estimate of 65.6% and shooting past the 100% mark from 2025.
Snip, snip …
Lullu Krugel chief economist at PwC said the country was in for a “shock” on Wednesday with regard to the deficit and debt trajectory because of the significant drop in tax revenue and the increased state expenditure that will arise.
Mboweni will need to give detail to some aspects of President Cyril Ramaphosa’s R500 billion economic support package announced in April, specifically where and how he will reprioritise R130 billion from previous allocations. Treasury is also expected to reveal whether or not it will fund the restructuring of South African Airways ahead of the airline’s creditors meeting on Thursday.
“We should expect anything that was not productive in the past to be cut,” said Krugel.
“We will have to see some movement of expenditure into areas that can create growth because that is the only way where, over the long run, we can move to a sustainable fiscal position. Otherwise, we are just going to see debt run away completely,” she added.
Lumkile Mondi, a senior lecturer at the School of Economics and Business Science at Wits University, said the country was likely to see an austerity budget which requires a substantial structural reform programme addressing blockages in the information and communications technology, transport and energy sectors.
“I think Treasury is determined to ensure that SA does not find itself carrying a begging bowl to the International Monetary Fund (IMF) and World Bank because it cannot service its piling debt,” he said.
But Mondi warned that Treasury could only put those reforms on the table and the implementation remains with the various cabinet ministers. Given the history of a lack of political will to enact reforms Mondi said the emergency budget is likely to be another “talk shop”.
“We know nothing is going to be done by these ministers because there is no hegemony on the economic programme to take SA out of this crisis of high unemployment, poverty and inequality.”
Sources of funding
Krugel said measures on how to stabilise and grow the tax base will be critical as this will be the main driver behind the deficit and overall debt.
As it stands tax revenue is expected to drop by just under R300 billion this year.
Treasury has already begun plugging that hole with borrowings. On Friday it announced that the New Development Bank approved a $1 billion (R17.3 billion) emergency assistance programme loan for health and socioeconomic needs. An application has also been made to the IMF to draw $4.2 billion (R72.8 billion) to fund the government’s Covid-19 response.
Krugel said an announcement on tax increases to narrow the gap was unlikely and government may instead announce an extension on the various tax breaks announced in the phased response to stabilise the economy.
An increase in taxes would be unwise particularly now when households and firms were experiencing their own financial crunch. Krugel said the country also wanted to attract foreign investors and an increase in taxes, which are already relatively high, would have the opposite effect.
Another burning issue that has reached no resolution since it was first announced in February is the move by the government to renege on implementing the final year of the three-year public sector wage agreement entered into in 2018.
The public sector wage bill accounts for around one-third of government spending and in an effort to carve out savings Mboweni announced plans to reduce the bill by R160 billion over the next three years, starting with the R37.8 billion meant for increases in April.
Reuben Maleka, assistant general manager for the Public Servants Association (PSA) said the union expected Mboweni to ensure that the supplementary budget caters for public service increases.
The PSA is part of a number of public sector unions which have lodged an application with the Labour Court to order the government to enforce the contractual agreements which they say are legally binding. Maleka said the unions would not relent.
“Minister Mboweni has only one opportunity to make sure that he caters for our resolution to be paid come Wednesday,” he said.
Matthew Parks, trade union federation Cosatu’s parliamentary coordinator, said it would “collapse” collective bargaining if the government did did not honour the agreement and it is “unconscionable for the government to simply pass the buck for its mismanagement of the budget onto workers”.
“Government has been talking since lockdown about the critical role that nurses, doctors, teachers, police and prison officers play, yet they now basically want to pickpocket them by denying them a simple increase to protect their wages from inflation,” said Parks.
Mondi said Mboweni would not be able to deliver on his earlier announcement to cut public sector wages saying this would require the full backing of the ruling party’s Tripartite Alliance.