South Africa’s new budget cushions the coronavirus blow – but only briefly

A debt crisis looms in the country.
Finance Minister Tito Mboweni. Image: Kopano Tlape GCIS

The adjustment budget tabled by South Africa’s finance minister, Tito Mboweni, this week is less an adjustment than a new budget. That was necessitated by three things: a collapse in economic activity, a large decline in tax revenue collection, and the need to increase the money allocated to departments and programmes linked to the government’s Covid-19 response.

The adjustments to the 2020 budget partly cushion the initial blow of the Covid-19 pandemic and the government’s lockdown. But the relief is only temporary and measures to contain the growth in debt will bite hard in years to come.

Some cried wolf about austerity budgets in South Africa after the global financial crisis in 2008 before they were actually a reality. In 2021, the wolf will likely be at the door.

The Treasury predicts that revenue will be R1.1 trillion instead of R1.4 trillion – R300 billion less than projected in February this year. Proposed spending is now R40 billion more than in the February budget, although R7 billion of this is debt-service costs. The headline result is that the main budget deficit – the gap between government’s income and spending – will balloon to be 14.46% of gross domestic product instead of the planned 6.8%.

The government intends to cover part of that by borrowing about US$7 billion from multilateral institutions like the New Development Bank and the International Monetary Fund. But that will finance less than half of the R344 billion increase in the borrowing requirements. This means more conventional borrowing at a time when the costs of doing so, after recent credit downgrades, are high.

The scale of the changes renders the country’s annual budget tabled in February redundant by normal standards, along with much of parliament’s interrogation of those proposals in subsequent months. From the onset of the lockdown it was clear that this would be the case. So Parliament could, and should, have played a more proactive role by, for example, facilitating public engagement with the Treasury on fiscal options for responding to the effects of the pandemic and lockdown.

The legislature’s lacklustre approach will mean that, as has been the case in non-crisis periods, the minister’s proposals will almost certainly be rubber-stamped with no substantive public consultation or influence. And that is particularly egregious given the serious implications for all South Africans of the dramatic worsening of the country’s finances since February.

Lockdown froze economic activity

The collapse in economic activity at the root of this is the result of both the pandemic itself and the government’s response. Fear of the virus and basic measures such as social distancing, travel restrictions and limits on gatherings would have had a significant impact on economic activity anyway. But the lockdown is arguably the larger factor. It stopped most economic activity by decree. And that is also why the government is now moving hastily to ease it, even as the rate of new infections increases.

The budget indicates that R142 billion has been allocated to Covid-19 measures – approximately 9% of total spending. That includes a R41 billion increase in social grants, which is lower than the originally announced R50 billion. As indicated by the bigger picture, most of this is not new spending. About R110 billion comes from various forms of reallocation from other, previously planned government expenditure areas. The full details of how such re-allocations happen, and the possible consequences for public service delivery of the associated trade-offs, will likely only be available after the fact.

Reduced economic activity has meant reduced tax collection. The fall in revenue is worsened by tax relief measures to cushion businesses and employees from the effect of the lockdown restrictions and broader economic downturn. The bigger consequence of this is that the ratio of national debt to GDP, which was already unprecedentedly high and repeatedly above targets, will increase to 81.8% instead of 65.6%. The Treasury states its intention to get this under control through a series of measures that will be announced in the medium-term budget policy statement in October and the 2021 budget.

One dimension of those proposals will seek to raise an extra R40 billion of tax revenue.

Strangely, however, the adjusted budget includes no proposals to increase taxes on the minority of individuals who will maintain high, stable incomes in the current year.

So despite rhetoric that sacrifices will need to be made, there appears to be little appetite to increase the contributions to government’s efforts from the most well-off in society during the pandemic. This group includes the politicians and officials making these decisions.

Debt crisis looms

The budget proposals seek to emphasise the need for future, drastic action with projections showing that national debt under a scenario of “public finance as usual” will increase to 106% of GDP over the next few years.

Historical precedent suggests that the chances of a developing country avoiding a debt crisis at that level of debt for any sustained period of time are very low.

However, there were already few substantive ideas for changing the pre-pandemic outlook. It’s therefore doubtful that the Treasury has the ability to come up with ideas in the face of an even more dire situation. There has been a great deal of talk about the need for “structural reforms”. But those that have been placed on the table don’t hold up to close scrutiny. Instead, they are simply the most recent manifestation of a view that privatisation of various kinds is some kind of panacea for state failure.

In reality, the kinds of sweeping governmental, social and economic changes required to change the country’s trajectory have for some time been outside the scope of what a Treasury should, or is capable of, determining.

South Africa has not come to terms with that and so there is little ability to conceive of alternative approaches, never mind adopt them.

Seán Mfundza Muller is senior lecturer in Economics, Research Associate at the Public and Environmental Economics Research Centre (PEERC) and Visiting Fellow at the Johannesburg Institute of Advanced Study (JIAS), University of Johannesburg.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Unless corruption and the unsustainable public sector wage bill are tackled, we may never come out of the deep recession.

A slow motion plunge back into the black hole we tried to “Emerge” from. .

I see people starving all over Cape Town when I drive around. Still our leaders do not open up the economy. Social distancing is impossible for the majority of our people and they are suffering the most at the hands of the leaders they chose. The deaths caused by the lock down policy will eclipse the deaths from the virus. The loss of tax revenue is self inflicted and ongoing. Stop the lock down. Get back to work. Stay at home if you think your risk is too high. Be adult in decisions you make. Vote against the current leadership.

..and WHO caused this economic “blow”?

Can’t be the virus.

“Life can only be understood backwards, but it must be lived forwards.”
― Søren Kierkegaard

To be properly prepared for tomorrow, we have to consider many daily events and see it in perspective to our knowledge of history, science and human nature. We compare new information to our “database” of knowledge to categorise that information and to draw conclusions from it. This process requires a certain level of cognitive ability. People have vastly different opinions and expectations of the future because they have different levels of cognitive ability. The history is known. The facts are given and available. Yet, after considering the same available data set, different people have different expectations about the future.

The ability to use working memory, category formation, pattern recognition and multiple simultaneous attention is required to draw a link between the past and the future. To “connect the dots”, we need cognitive flexibility. This explains the different opinions about lockdown measures. Some ban surfing and cigarettes while others want to surf and smoke.

That brings us to the point. The vast majority of politicians and 99.9% of voters are oblivious to the dangers lurking behind a Debt/GDP ratio and a budget deficit. When a nation has a Debt/GDP ratio above 60%, a budget deficit beyond 6%, a large public wage bill with government employees that demand wage increases larger than the rate of inflation, when the state issued large guarantees to bankrupt SOEs, when 90% of municipalities are bankrupt, when militant labour unions have political power, and the economy is strained under socialist policies, then the bomb of catastrophic financial destruction is primed.

It only takes a banking crisis to light the fuse. Expropriation without compensation destroyed the collateral held by banks and triggered a banking crisis in Zimbabwe. Lockdown will destroy a significant proportion of the collateral held by local banks. The government has lit the fuse with lockdown measures.

The Reserve Bank has the mandate to resuscitate the banking system. The Reserve Bank will print the money to replace the loss of collateral. This process has already begun. When this process gets out of control, to the same extent to which the socialist politics is out of control, then hyperinflation of the currency is unavoidable, it is baked into the cake.

Those who are endowed with a good level of cognitive flexibility are preparing for this scenario. They are connecting the dots as we speak.

Absolutely. We will recall a rand of 17 to the dollar with nostalgia.

The lockdowns have imploded the economy and our leaders are too ……..put your own adjective here, and too careless to realise the damage they have done.

The municipality of course, is too heartless and has come out with a 7% electricity price increase, probably to fund its planned 8% increase for employees.

And our electorate is too ……..to realise what’s going on and will return the ANC to power until Jesus returns.

Incredibly, the mainstream media in the country are also too…….to catch on and keep on painting the government as our saviors instead of our destroyers.

Its all too depressing and I, for one, wish I had the means to emigrate.

For 1 minute let’s stare at the beast straight in the eyes.

1) Unemployment is over 40%
2) Federal Deb5 total R3.7 Trillion
3) SOE + Municipal + provincial debt just over R3 trillion
4) Trust in Government is at a all time low
5) SA is in the worst economic recession over 90 years

There is actually very little positive news to say about the current state of South Africa, violence and protests will flare up until real change comes.

The next 10 years will be a rough ride for almost all South Africans.

Crime will rise and rise.very sad.

If you can flee the failed state. The hole is too deep. In 3 year s time the Western world and Asian Tigers will be booming again…and we will be at the bottom of Africa. Broke, hungry, failing medical with a begging bowl.

The time when the ANC government runs out of other peoples money has finally arrived. They worked long and hard for this to happen. We are and will be living in interesting times. VIVA !

All of this caused by the anc government.being bankrupt before lockdown and keeping most businesses closed for 3 months,is like going from worse to the apocalypse.

End of comments.

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