Finance Minister Tito Mboweni focused his supplementary budget on stabilising debt by improving the government’s spending patterns and creating a foundation for economic revival.
The adjustment of the budget, delivered to the nation on Wednesday afternoon, came in the wake of the economic downturn caused by the Covid-19 coronavirus pandemic.
A second adjustment budget will be tabled in October together with the medium-term budget policy statement, he said.
“Most of our energies and resources have been focused on the Covid-19 pandemic. We have quickly adopted temporary countercyclical fiscal and monetary policy measures. After the storm ends, we must work just as quickly to emerge with a sustainable fiscus,” Mboweni said.
“But debt is 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.”
Mboweni said Covid-19 had turned the global economy upside down.
“In the February budget, we expected that the global economy would expand by 3.3% in 2020. We now expect a global contraction of 5.2% this year. This will bring about the broadest collapse in per capita incomes since 1870. South African unemployment increased by one percentage point, reaching 30.1% in the first three months of this year,” said Mboweni.
The South African economy is now expected to contract by 7.2% in 2020 – the largest contraction in nearly 90 years. Inflation will likely register 3% in 2020.
“Commodity price increases and a weaker oil price have softened the blow, but as a small open economy reliant on exports we have been hit hard by both the collapse in global demand and the restrictions to economic activity,” he added.
Although he said South Africa had responded to this economic shock with an unprecedented set of measures, Mboweni remained confident that the country could achieve “anything” if South Africans stood together.
“Government’s Covid-19 economic support package directs R500 billion straight at the problem. This is one of the largest economic response packages in the developing world,” he said.
But the country is already R35.3 billion behind on its 2020/21 tax target.
As a consequence, gross tax revenue for the 2020/21 fiscal year is revised down from R1.43 trillion to R1.12 trillion.
“That means that we expect to miss our tax target for this year by more than R300 billion,” Mboweni said.
Projected total consolidated budget spending, including debt service costs, will exceed R2 trillion for the first time ever.
“Taken together the measures and adjustments we present translate into a consolidated budget deficit of R761.7 billion, or 15.7% of GDP in 2020/21. This is compared to the deficit of R370.5 billion, or 6.8% of GDP projected in February. This increase is mainly due to the revised revenue projections and pay-outs from the Unemployment Insurance Fund. The narrower measure, known as the main budget deficit, is projected to be 14.6% of GDP,” Mboweni said.
His early projection is that gross national debt will be close to R4 trillion, or 81.8% of GDP by the end of this fiscal year.
This is compared to an estimate of R3.56 trillion or 65.6% of GDP projected in February.
“Without external support, these borrowings will almost entirely consume all of our annual domestic saving, leaving no scope for investment or borrowing by anyone else,” Mboweni said.
“For this reason, we need to access new sources of funding.”
Government intends to borrow about $7 billion (about R121 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,” Mboweni said.
The supplementary budget proposes R21.5 billion for Covid-19-related healthcare spending. It also proposes an additional allocation of R12.6 billion to services at the frontline of the country’s response to the pandemic. This money partly supports increased screening and testing, allowing South Africa to open up more and more of the economy.
“The government has opted to take an active approach to the crisis – a nation that takes active steps to rapidly stabilise debt and grow the economy. By doing this we will create jobs, reduce the cost of doing business and build a competitive economy,” Mboweni said.
Government will narrow the deficit and stabilise debt at 87.4% of GDP in 2023/24.
Cabinet has also adopted a target of a primary surplus by 2023/24.
The medium-term expenditure framework process will be guided by the principles of zero-based budgeting and will be applied as a series of overlapping evaluation exercises targeted at large programmes.
“Our current system of public expenditure reviews is a step towards zero-based budgeting,” said Mboweni.
“This means that we will try to reduce all expenditure that we thought we can no longer afford. After all, we are not as rich as we were 10 years ago.”
• Spending adjustments of about R230 billion over the next two years.
• Tax measures of R40 billion over the next four years. The government will announce details to these tax proposals in the 2021 budget.