- Finance Minister Tito Mboweni is set to deliver the adjusted budget on Wednesday.
- The pandemic is likely to lead to an economic contraction of 8-10% in 2020.
- But the minister has little room to manoeuvre and is unlikely to receive support for cutting government salaries or stopping the resuscitation of SAA.
- Under the circumstances, he may have to reprioritise with the help of multilateral development institutions.
On Wednesday, 23 June, Finance Minister Tito Mboweni will be delivering the adjusted budget, which is a revised post Covid-19 budget. The minister will likely announce that the pandemic will lead to an economic contraction of between 8-10 percent in 2020, a deficit of 14 percent and a debt to GDP ratio of over 80 percent.
These are unprecedented numbers that will require Mboweni to think out of the box and make tough and unpopular decisions.
Unfortunately, the pandemic hit us when we were at our weakest financially. The South African economy was already in a recession with very little fiscal space.
The budget deficit was projected to be 6.8 percent of GDP - compromised by the government's insistence on paying R60 billion to rescue Eskom and SAA. The deficit was expected to widen despite the government's plan to cut the growth in the wage bill by R160 billion over the next three years.
Budget 2020 was delivered almost a month before the lockdown, and was incredibly weak.
When the country went into lockdown, we already had a blueprint of what would be financially required - from the countries affected before us. A R500 billion fiscal support package, which combined revenue and spending measures, was issued by Treasury.
The fiscal support package included short-term economic support measures, such as increasing healthcare spending, expanding grants, providing temporary employment relief scheme, tax deferred and the postponement of new taxes. A new credit guarantee scheme was introduced, which ideally should allow businesses to access credit without having the necessary collateral or credit history.
The fiscal support has not been completely effective and the problem is mostly due to the onerous requirements needed to get a loan. As such, many companies supposed to receive support have been left to fend for themselves, leaving many to be victims of the virus.
Mboweni is expected to deliver a budget that will help the economy from sinking further, while putting reforms in place that will help kickstart economic growth.
The health budget, which was previously about R229.7 billion, will increase substantially, boosted by the $1 billion Covid-19-related funds from the recent loan from the New Development Bank. The NDB loan will also help the government pay for the R350 grant top-up.
Treasury could also opt to reallocate the initial R229.7 billion health budget elsewhere, and then utilise the $1 billion on health over the next few years.
The education budget, which was previously R396.4 billion, will have increase to accommodate problems unearthed by health protocols that require students to social distance and sanitise. Even before the pandemic, funds allocated for water and sanitation and for the extension of schools due to overcrowding appear to have been misused, leaving many schools dilapidated and ablution facilities unsafe.
The failure to trim the wage bill in order to cut expenditure may have led to the proposal of a zero-based budgeting process. Government departments have, typically, underspent their budgets - only to spend most of it just before the financial year ends in order to prevent a reduced budget the following year. This behaviour is called fiscal dumping.
Each year, government departments receive a larger budget when adjusted for inflation. Budgets ballooned, so did headcounts and yet there was very little in terms of productivity to show for it.
A zero-based budget implies that each government budget starts from a zero-base and a requisition for funds will be based on strategic projects that are also growth enhancing. A key strategic objective is infrastructure; therefore, all government departments will have to prioritise infrastructure and align with the broader national objective of achieving sustainable growth through infrastructure investment.
The wage bill
While a zero-based budget model may sound like a noble idea, the test lies in its successful implementation. The other challenge is the composition of spending. A large share of government expenditure has become autonomous, and changes to it will be contentious. For instance, 33 percent of government spending is wages.
Current transfers, which accounts for 29 percent, continue to increase because of fee-free education and larger Unemployment Insurance Fund payments. Increased reliance on social grants and the need for medical supplies have made it virtually impossible for Treasury to make expenditure cuts.
If the National Health Insurance is factored in, government spending will increase further.
All this leaves very little room for the successful implementation of a zero-based model because the composition of spending has, over the years, moved away from capital to consumption.
The other challenge is that infrastructure implementation is longer than a year and, therefore, planning and budgeting must align to multi-year expenditure plans to minimise budgeting errors.
With little room to manoeuvre and not enough guts or political support to cut government salaries by 15 percent across the board, and to stop the nonsensical idea of resuscitating SAA, Mboweni may be left with doing a reprioritisation exercise with some help from multilateral development institutions.
*Thabi Leoka is an independent economist who has worked in financial services for over 17 years. She is interested in fiscal and monetary policy. She is also a member of the Presidential Economic Advisory Council. Views expressed are her own.