Supplementary Budget 2020

Here's what you can expect in Mboweni's emergency budget

Minister of Finance, Tito Mboweni, addresses the media during the 2020 National Budget Press Conference in Cape Town. (Photo by Gallo Images/Ziyaad Douglas)
Minister of Finance, Tito Mboweni, addresses the media during the 2020 National Budget Press Conference in Cape Town. (Photo by Gallo Images/Ziyaad Douglas)
Gallo Images/Ziyaad Douglas

The Covid-19 pandemic has brought about an unprecedented turn of events, exposing inequalities and poverty prevailing in society, as well as the structural weaknesses in the SA economy. This grim reality warranted that government put together a R500 billion stimulus package to cushion the blows of the pandemic on consumers and businesses who have been negatively impacted by a nationwide lockdown instituted to slow the spread of the virus and to prepare the public healthcare system.

Finance Minister Tito Mboweni will this afternoon table a special adjustment budget, which is a modification of the national budget tabled in February as it makes provision for the state's Covid-19 response. The adjustment budget will also indicate from which government departments R130 billion, which forms part of the R500 billion stimulus package, will be reprioritised.

The lockdown, which has been ongoing for nearly three months, has been regarded as one of the strictest in the world, nearly bringing economic activity to a complete halt. The SA economy is not the only one which has been negatively affected, the global economy has entered into a recession said to be worse than that of the Great Depression of the 1930s.

Fin24 understands that the decisions Treasury has made in reprioritising expenditure for this emergency budget have been informed by global trends. Mboweni is also expected to announce Treasury's revised outlook on a number of issues such as GDP, debt as well as tax revenue.

"The numbers won't be great, that we know," said Johann Els, chief economist of Old Mutual. While Els said it would be ideal to hear policy announcements, mainly on structural reforms, he does not think that will be the case in this budget.

Here are some of the issues Mboweni will likely address:

Updated economic outlook

Treasury had previously projected a contraction anywhere between 5.4% and 16.1%, Mboweni will likely provide an update on this figure and the implications for jobs. According to Treasury's current estimates, job losses could be between 630 000 and 1.8 million.

Negative growth will have implications for the budget deficit, according to documents leaked by Mboweni over the weekend, Treasury expects the budget deficit to climb to 14%, up from the 6.8% it reported in February.

"We need to be mindful that the health shock [of the coronavirus hasn't driven the economy to where it is," said University of the Western Cape Professor Matthew Ocran. He noted that the economy had already been "faltering" ahead of the lockdown which was implemented late in March.

"Things were not going well. The pandemic has made it much worse. We must not just focus on the post-Covid-19 recovery, we need to look at structural issue which have driven the economy to where it is now, and begin to tackle that," he said.

Ocran said it has become increasingly important to address the structural issues which have been holding back growth over the past 10 years. "Until we do that, we are going to have a very pedestrian, lacklustre economic performance," he said. 

Revenue shortfall

A lack of economic growth, will compromise tax revenue collections. Treasury's leaked document indicates tax revenue collections are estimated to be 23% of GDP, relative to the budget's expenditure items which are around 37% of GDP, Fin24 previously reported.

In addition, government has introduced as much as R70 billion in tax relief measures, as part of the stimulus package, such as deferrals on some tax payments such as carbon tax, excise duties and employee taxes, among other things.

A ban on cigarette and alcohol sales also had negative implications for excise duty collections. Back in April SARS Commissioner Edward Kieswetter said these restrictions saw a loss of R1.5 billion in excise duties. The minister has also been outspoken about his opposition to the ban on these items. Overall SARS projects tax collections fall short by R285 billion this year. Mboweni will likely weigh in on this.

Poor tax collections might push government to borrow more, and the debt-to-GDP projections are already quite steep.

Soaring debt levels

Treasury's leaked documents also reflect that the debt-to-GDP ratio will move beyond dangerous territory, nearing 83.3%. In comparison, the February budget projected a Debt-to-GDP ratio of 65.6%.

Mboweni is expected to confirm this latest projection.

But when asked if this means we are heading for fiscal cliff, Investec economist Lara Hodes highlighted that Mboweni has suggested zero-based budgeting going forward to avoid that. This is a "prudent" form of budgeting, requiring justification for expenditure, which is only completely necessary. Mboweni has said this means only prioritising spending on infrastructure and growth enhancing measures.

Economist at Efficient Group Dr Francois Stofberg said, fortunately, South Africa will not face too much hostility from sovereign credit rating agencies because corona has shifted the global economy's realities.

Troubled SOEs

Perhaps not the main focus of this budget, state-owned enterprises (SOE) are still a drain on the fiscus relying on bailouts over the past decade. With Mboweni having to prioritise Covid-19 expenditure, it's unlikely SOEs would be first in line for rations. 

President Cyril Ramaphosa has previously stressed the need to reform SOEs, so that they can play a transformational and development role in the economy. He recently announced appointments to the SOE Council, tasked with reforming these troubled state entities.

Similarly Ocran said there is an "urgent need" to reform SOEs, given the resources that have been "wasted" in bailouts. "These resources can be used productively in the economy – infrastructure, providing social housing, supporting healthcare and education. [These are] activities that can benefit broader masses of the population," he said.

Business Leadership South Africa CEO Busisiwe Mavuso said she hoped that the supplementary budget and the broader economic crisis would inspire government to rethink its hard line approach on state-owned entities.

"Government does not have to own all of SOEs and one albatross that has hung on our necks is these SOEs and how much they drain on our resources whilst adding very little value," said Mavuso.

Public wage war

The first major test for the minister of finance will come in the form of his proposals for the public service wage bill.

In his February budget, he proposed to cut the state's wage bill by R160.2 billion over three years. Unions in the public service pushed back against this proposal immediately, calling it tantamount to waging war on public servants.

To complicate the matter even further, April came and went without government honouring a 2018 wage agreement to hike public service wages by CPI plus 1% for general workers and CPI plus 0.5% for workers at a director level from 1 April.

The matter is currently before arbitration. The supplementary budget is an opportunity for Mboweni to stand his ground, especially in the contest of the pandemic. National Treasury has advised that the supplementary budget will come with spending adjustments for all spheres of government.

Stofberg said with considerable adjustments such as a smaller public wage bill, the kinds of spending levels South Africa has had in recent years could be sustained and even justified.

South Africa can be a big winner in the long term future if we spend more effectively efficiently and on the right things, Stofberg said.

A lifeline for business

Provisions such as the R200 billion loan guarantee scheme as a measure to soften the blow of the coronavirus pandemic and the national lockdown on banks as well as their individual and business clients.

Business formations believe this can be scaled up and its cover be made more comprehensive.

Executive General Manager for Impact Investing at Business Partners Limited, David Morobe, said Mboweni needs to provide greater support for the small and medium enterprises that have been hit the hardest by this pandemic through an SME tax rebate.

"It will also assist in reducing unemployment during this difficult economic time, which would in turn ease the burden on the Unemployment Insurance Fund and social grant support needed to support the unemployed," said Morobe.

Bans and lifeboats

The lockdown aimed at curbing the spread of the coronavirus has rocked various sectors of the economy, but tobacco businesses have had a particularly rough time since the lockdown commenced.

Government has seen strong opposition from business formations and lobby groups to the ban on cigarettes even after the ban on alcohol was lifted, which some argue has only served to bolster the trade of illicit tobacco.

Mboweni will be hard pressed to offer consolation to tobacco businesses, salons, barbers and other business that abide by the lockdown conditions have are yet to receive adequate assistance and support in the throes of the inevitable fallout.

Mavuso said the R130 billion re-allocations within the existing budget will still have to come from somewhere. She said these will either be consumption expenditure, capital expenditure or maintenance.

"We all know that we are in a hopeless situation. What normally keeps people confident is, even if things are bad, we have a clear path for the future. Consumer confidence is at an all-time low and business confidence are at their worst levels ever," said Mavuso.

Mavuso said there was private sector capital that can be spent on investment and infrastructure so that positive investment can be sustained and cuts can be made to spending on consumption instead.

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