An ashen-faced Finance Minister could offer no green shoots during his emergency budget presentation on Wednesday, warning instead that South Africa would record its worst economic performance since the Great Depression with a projected contraction of 7,2%.
Tito Mboweni’s signpost to economic recovery was: “We reduce our reliance on borrowing. We feed the hungry. We look after the sick. We educate our people. We build for the future.
“We spend with wisdom, and we jail those who loot.”
But his special adjustment budget tabled on Wednesday gave no details on how this would be achieved.
Instead, Mboweni sombrely warned that debt was set to swallow up GDP if expenditure remained unchecked.
“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.”
Debt service cost has become the fastest-growing item — to R229,3 billion in 2020, according to February’s Budget, up from R201,2 billion in 2019 and R184 billion in 2018.
Mboweni further noted: “Eventually the gains of the democratic era would be lost. The wide gate opens to a path of bankruptcy. A sovereign debt crisis is when a country can no longer pay back the interest or principal on its borrowings. We are still some way from that. But if we do not act now, we will shortly get there.”
And that action includes, from July, unprecedented zero-based budgeting, which he described as the “narrow gate” government would go through as part of the economic recovery road map. It would stabilise the debt at 87,4% of GDP by 2024 and narrow the deficit. Invoking the image of a hippo’s wide-open jaws — to symbolise the gap between income and expenditure
The grim financial position means SA will have to borrow $7 billion (R121 billion) from international finance institutions, according to Mboweni. He warned: “We must make no mistake, these are still borrowings. They are not a source of revenue. They must be paid back”.
But without such external support, there would be no scope for investment or other measures to sustain SA.
Mboweni fleshed out some of the cost items outlined in April when President Cyril Ramaphosa announced a R500 billion stimulus package to restart the economy devastated by the hard Covid-19 lockdown. Health will get R21,5 billion for Covid-19 spending, and a further R12,6 billion to frontline services, from modelling to screening.
Provinces get another R5 billion for catch-up programmes as schools are closed for at least three months now.
Another R19,6 billion will go to the Presidential Youth Employment Intervention, which earlier this year had already been allocated R6,1 billion.
The Land Bank, however, got R3 billion. That’s because, like Eskom, the Land Bank was “too important to fail”, as Mboweni put it. And for Eskom, Mboweni cautioned it needed “to show progress in meeting the milestones as laid down in the road map” to unbundle into three entities — transmission, distribution and generation. That was non-negotiable, Mboweni said.
There was a mixed reaction Mboweni’s budget, which the Pietermaritzburg Economic Justice and Dignity (PMBEJD) describing as “a missed opportunity”. “We are extremely disappointed with the announcement that Covid-19 social grants, including the R250 increase on old-age grants, will come to an end in October.
“The grants were helping to inject cash into the economy and if kept for another three years, would have contributed immensely to the economy’s recovery,” PMBEJD programme co-ordinator, Mervyn Abrahams, said.
Mboweni, who announced that the country’s economy would shrink by seven percent in the current financial year, said government would be focusing on narrowing its deficit, currently sitting at more than 15% of the GDP.
Government, Mboweni said, was concerned about the country’s debt projected to hit close to R4 trillion by the end of the financial year.
However, Abrahams expressed concern about the government’s approach, saying government should be borrowing more to invest in infrastructure programmes that will help stimulate economic growth.
“We currently have massive unemployment and the only way government can assist in job creation under the circumstances is to inject more funds into the economy.
“Where there are budget cuts the funds should be diverted to programmes that will help the economy to recover,” Abrahams said.
The PMBEJD also monitors the country’s basic food prices.
Abrahams said the poor would find it difficult to access extra cash to buy basic food items should government adopt contractionary fiscal policies.
“If you continue on that path then you create a situation where there would be very little money circulating. And that’s extremely bad for the economy,” he said.
Pietermaritzburg and Midlands Chamber of Business (PMCB) chief executive, Melanie Veness, however, said cutting down on borrowing was a prudent move on the part of government
“The projections are alarming and the outlook is, quite frankly, terrifying, which is why we are relieved to see the acknowledgment by the finance minister of the looming fiscal reckoning if we don’t take drastic action to address debt and control the budget deficit.
“He is not being alarmist when he says that we are facing a sovereign debt crisis if we fail to act. We can’t borrow more money,” she said.
Apart from cutting allocations to provincial governments, Mboweni also announced a cut on allocations to national departments. The cut on national and provincial budgets would make it difficult for the KwaZulu-Natal economy, which heavily relies on tourism, to fund the sector’s recovery plan.