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As the analysis builds up in reaction to Finance Minister Tito Mboweni’s 2020 budget speech, we’ll compile some of the responses below.
South African National Budget 2020/2021 – a brief review
By Kevin Lings*
The South African Minister of Finance, Tito Mboweni, delivered his second National Budget on Wednesday, 26 February 2020, having been appointed as Minister of Finance on 9 October 2018. Minister Mboweni is the only South African to have served as both Governor of the Central Bank as well as Minister of Finance.
South Africa’s economic performance remains extremely fragile. In the third quarter of 2019, South Africa’s GDP declined by -0.6% quarter-on-quarter, while subsequent economic data suggests that the economy remained extremely weak in the final quarter of the year, aggravated by substantial electricity outages, especially in December 2019. Most analysts estimate that the South African economy grew by a mere 0.3% in 2019 and might have slipped back into recession in the second half of 2019 given the most recent manufacturing and retail sales data.
Furthermore, over the past five years, South Africa’s GDP growth averaged around 0.8%, which is the worst five-year average economic growth rate since the mid-1990s. Stated more simply, this is South Africa’s weakest economic performance, measured over five years, since the end of apartheid.
Under these circumstances it is understandable that the unemployment rate has continued to rise. At the end of 2014 there were an estimated 7.31 million people unemployed (including discouraged workers). This had risen to a staggering 9.58 million at the end of 2019 – an increase of 2.27 million people. The high rate of unemployment contributes to much of the social tension, inequality and anguish experienced in South Africa daily, especially among the youth. Increasing employment in South Africa must be the number one economic, political and social objective, and can only be resolved meaningfully through a concerted and sustained effort to improve skills development as well as encourage private sector fixed investment spending, business development and entrepreneurship.
South Africa’s GDP performance has also not kept pace with the population growth, which is currently around 1.3% per year. Over the five-year period from 2015 to 2019, South Africa’s GDP per capita (in real terms), fell by an annual average of 0.6%. This means that over the past five years, South Africa’s average income per person has declined by almost 3% (cumulative) in real terms, and by more than 8.5% in Dollars. The persistent decline in income per capita since 2014 has clearly worsened the level of poverty in the country as well as aggravated the already high level of income inequality.
During the 13 February 2020 State of the Nation address, President Ramaphosa highlighted that “our country is facing a stark reality. Our economy has not grown at any meaningful rate for over a decade”. Furthermore, he said “the recovery of our economy has stalled as persistent energy shortages have disrupted businesses and people’s lives. Several state-owned enterprises (SOEs) are in distress, and our public finances are under severe pressure. It is you, the people of South Africa, who carry this burden, confronted by rising living costs, unemployment, unable to escape poverty, unable to realise your potential”.
Given these circumstances, it is understandable that the Finance Minister presented a sobering update of South Africa’s fiscal parameters, with clear evidence of substantial fiscal constraints.
The systematic deterioration in South Africa’s fiscal position largely reflects the combined effect of three major constraints, namely a fall-off in tax revenue due to weaker than expected economic growth, the provision of significant additional finance to support many of the SOEs including Eskom, and inefficient spending by many government departments. As a result of these three constraints government debt has risen from a low of 26% of GDP in 2009 (at the time Moody’s had assigned South Africa an ‘A’ credit rating), to an estimated 65.6% of GDP in 2019/2020 and is expected to rise to over 70% of GDP within the next three years. This means that in value terms, over the past three fiscal years, government debt has risen by a massive R943 billion, equivalent to R26.2 billion a month, or an average of around R1.19 billion each working day. Given this sharp fiscal deterioration it is unsurprising that Moody’s Investors Service decided, some time ago, to revise South Africa’s credit rating outlook from stable to negative. Unless there is significant fiscal consolidation and an improvement in economic growth, the country risks its credit rating moving to below investment grade from all three major credit rating agencies.
This increase in public sector debt is especially damning considering the deterioration in South Africa’s socio-economic conditions, especially sustained low economic growth, record high unemployment, a record low savings rate, systematic downward revisions to the credit rating, regular electricity outages, a fragile water supply, the deterioration in public sector health and poor education outcomes.
More positively, it is encouraging that the Minister of Finance has highlighted South Africa’s recent fiscal deterioration and is trying to introduce policy changes to restore fiscal discipline, albeit over an extended period.
The 2020/2021 budget numbers
For the 2020/21 fiscal year the Minister of Finance announced that the budget balance will weaken noticeably to -6.8% of GDP, down from a downwardly revised -6.3% of GDP in 2019/2020. This is worse than what the Minister projected in the October 2019 Medium Term Budget Policy Statement (MTBPS) and well in excess of the guideline of less than 3% of GDP suggested by many analysts and rating agencies. In 2021/2022 the fiscal deficit is then expected to improve marginally to -6.2% of GDP, before stabilising at -5.7% of GDP in 2022/23. In South Africa, currently, every 1% of GDP is the equivalent to roughly R50bn.
It should be noted that in the prior decade, government persistently aimed to reduce the budget deficit to below -3% of GDP, but was clearly unable to meet their fiscal targets, largely as a result of a sustained weak economic growth and an inability to reign-in government expenditure, especially consumption spending and salary expenses.
The government also no-longer intends to achieve a primary budget surplus (which is the budget deficit less interest costs) over the next three years. A primary surplus would go a long way towards convincing the public, investors and credit rating agencies that government is serious about its intention to achieve a more disciplined financial framework. However, in previous years the government also projected a return to a primary budget surplus but failed to achieve the necessary level of fiscal consolidation. For 2020/2021 the government is projecting a primary budget deficit equivalent to a very substantial -2.4% of GDP.
Given the fiscal deterioration in recent years, it is encouraging that the Minister of Finance highlighted the need for government to much more actively control the rate of increase in its salary expenses – see discussion below. However, it is also clear that without an acceleration in economic activity, the fiscal authorities will continually struggle to meet their revenue targets as well as their budget objectives. In that regard, given the current balance sheet constraints within central government as well as SOE sector, economic policy will have to increasingly focus on the role of the private sector in driving economic growth. We would hope this includes a greater reliance on private-public partnerships as a means of lifting fixed investment spending.
The revenue side of the budget
In 2019/2020 tax revenue massively underperformed budget by an estimate R63.3bn. This is R10.7bn more than the revenue shortfall the Minister of Finance highlighted in the October 2019 MTBPS, and another huge miscalculation by National Treasury. This is the biggest revenue shortfall since the global financial crisis, where government underestimated tax revenue by R66.4bn. It also means government had to borrow substantially more than it had anticipated at the start of the 2019/2020 fiscal year.
A breakdown of this revenue shortfall shows that the under-collection has been broad-based with the biggest shortfall coming from individual tax collection (R25.3bn behind budget), VAT (R16.3bn) and company tax (R12.9bn). On a positive note, excise duties outperformed the 2019 Budget, coming in at R4.4bn ahead of budget. Government also revealed that despite the increase in VAT refunds, which resulted in a moderation in the VAT growth, VAT refunds are expected to moderate as SARS refers more suspected fraudulent claims cases for audit or criminal investigation.
Unfortunately, the latest revenue shortfall means that government has missed their revenue targets for the sixth consecutive year. In the past this forced the authorities to look for additional sources of revenue. Back in the 2017/2018 budget the emphasis was on increasing in the top marginal tax rate for individuals from 41% to 45%, whereas in 2018/2019 the decision was taken to increase the VAT rate from 14% to 15%. In 2019/20, the government decided to raise additional funds by not adjusting for “bracket creep”.
Fortunately, and very positively, during the 2020/2021 budget the Minister avoided any significant tax increases. Instead, government decided to provide some relief at the personal income level by increasing the personal income tax bracket by more than expected inflation (5.5%), which should provide households with R2bn in tax relief. This effectively means that government’s personal income tax receipts are projected to rise by only 3.6% in 2020/2021 as most formal sector employees struggle to receive more than a 5% to 6% salary adjustment.
In order to make up this amount, government has proposed an above inflation increase in the carbon tax and to more than double levies on plastic bags. Other tax changes, include a further but unsurprising increase in the fuel levy as well as the road accident fund, the usual array of excise duties, and a further moderation in the medical aid tax credits.
In an effort to broaden the corporate income tax base and encourage business investment, the fiscal authorities are also planning on implementing, as soon a legislatively possible, two key tax reforms. Firstly, minimising tax incentives by repealing or redesigning incentives found to be redundant, inefficient or inequitable. And secondly, introducing new net interest deductions and assessed loss limitations to reduce profit shifting and base erosion. These reforms will allow government to gradually decrease the corporate income tax from 28% over time, which should improve competitiveness, encourage business to invest and increase production capabilities.
Overall, it might have been tempting for the fiscal authorities to increase a broader range of taxes, including the introduction of a new wealth tax, and/or a further increase in the VAT rate in order to help mitigate the ongoing fiscal slippage. However, this would most likely have proved counter-productive. Not simply from a political perspective, but also through its likely negative effect on tax morality and tax compliance. Consequently, the modest number of tax changes as well as the extent of the tax adjustments the Minister announced seem largely appropriate given the current economic circumstances.
The expenditure side of the budget
In 2020/2021 government expects to spend a total of R1,954.4trn, which is 6% more than it spent in 2019/2020. This is, unfortunately, still in excess of government’s projected inflation rate of around 4.4%, but more disciplined than prior years. It is also worthwhile mentioning that the 6% increase in expenditure includes a further allocation to key SOEs (for example SAA) as well as a R5bn contingency reserve, which presumably will only be used for national emergencies or natural disasters.
The bulk of government’s spending is allocated to learning and culture, R396.4bn, social development, R309.5bn and health R229.7bn. The fast-growing government functions over the medium term are economic development, community development and social development. Importantly, debt service costs remain the fastest growing expenditure item – see discussion below.
Critically, the 2020 budget review includes R160.2 billion reduction in government’s salary expense over the next three years – see discussion below. This will affect national and provincial departments, that receive transfers from government. More specifically, government has tabled and agenda item relating to the management of the public-service wage bill at the Public Service Coordinating Bargaining Council and will discuss with unions, options for achieving the required reduction. The targeted salary reduction can be achieved through a combination of modifications to cost-of-living adjustments, as well as changes to the annual pay progression costs and other staff benefits.
Lastly, and unfortunately, there is still not enough in the budget to directly promote job creation, although the Minister increased the income eligibility thresholds for the employment tax incentive scheme. Currently 1.1 million young people are supported by this programme.
Further details on National Health Insurance
While not much detail has been given regarding National Health Insurance, the Minister indicated that the enactment of the NHI Bill is expected to trigger large-scale reforms. In order to achieve these reforms, the Budget has reprioritised a mere R55.6m over the medium term (3-years) to the Health Department to strengthen its capacity to phase in NHI. In addition, the National Treasury has also reprioritised R25m this year to improve the quality of healthcare facilities to ensure that they can be accredited for NHI. It seems clear that government has insufficient funds to move ahead decisively with NHI.
Adjustments to the public sector wage bill
As mentioned above, a key point of focus in this year’s budget was government’s announced plans on reducing the wage bill. Over the last 10 years, compensation of public sector employees has become one of the largest components of government spending. As a percentage of total spending, it accounted for 35.4% of total consolidated expenditure in 2018/19. In 2019/20, this decreased to 34.1%, and is expected to decrease further to 32.6% by 2022/23.
As part of government’s R261bn baseline spending reduction plan over the medium term, government is proposing to reduce the wage bill by a total of about R160bn over three years from national and provincial departments. While the Minister acknowledged the importance of public servants for the delivering of public services, he recognises the need to curtail compensation spending in order to increase the allocation of resources to capital expenditure.
While this plan is positive both for improving confidence and reducing some of the risks to the fiscus, the initiative lacks the required details on the source of this reduction, more specifically whether it will be a moderation in wage increases, a reduction in personnel or both. Therefore, all the budget does is prescribe what the appropriate reduction needs to be but not how it will be achieved. The question remains whether this is a realistic plan, given the uncertainty regarding the ability to reopen the current wage agreement and the required buy-in from trade unions.
Debt servicing costs continue to rise at a very rapid pace
As mentioned previously, South Africa’s public sector debt is projected to continue increasing as a result the larger than expected fiscal deficit, rising to over 60% of GDP within the next three years. However, a further key risk to South Africa’s ongoing fiscal stability is the increase in state debt cost. While the interest cost on state debt remains manageable at just below 11% of total expenditure, it is now consistently the fastest growing components of government expenditure. In fact, nominal growth in the interest on state debt is expected to reach almost 12% in 2020/2021, which represents an additional R24bn in interest payments. Under these circumstances, a significant rise in bond yields, due to further credit rating downgrades, would put South Africa’s fiscal position under increasing strain. Already the cost of debt exceeds the total budget allocation for key government departments including public order and safety and housing development.
The 2020 National Budget was presented under challenging economic conditions, aggravated by a very significant tax revenue shortfall.
In that regard, it is encouraging that the Minister did not attempt to deliver a politically expedient budget, nor was there any shock tax announcements. Instead the Minister made bold statements regarding the need to reduce the government’s salary costs.
However, the success of this year’s budget will be determined by government’s ability to make real progress in reducing its salary expenses given the clear rejection of this proposal by Cosatu. Offering the trade union increased job security in return for more modest salary increases is going to be challenging task, that may yield only limited success.
While there are several policy options available to revitalise the South African economy in the medium-term (1 to 3 years) and therefore improve government finances, the range of workable solutions have diminished substantially over the past ten years given the destruction of the public sector’s balance sheet and the weakening of key public sector institutions, including many SOEs.
At this stage, the most viable policy initiatives would include substantially expanding the use of private-public partnerships, the extensive deregulation of the business sector in a concerted effort to make it easier to do business and lift business confidence, bold initiatives that make it easier and safer for foreign tourist to visit South Africa, the urgent clarification of key policy pronouncements, a demonstratable focus on restoring good governance, and the urgent reorganisation of South Africa’s energy and water sectors. All of which, with a clear sense of urgency.
All of these issues are, obviously, also going to be critical to Moody’s next credit rating review of South Africa at the end of March 2020. At this stage, we expect Moody’s to give South Africa more breathing space until much later in 2020 in order to determine if the government is able to be effective in meeting its expenditure objectives, more specifically controlling it salary costs.
- Kevin Lings is chief economist at Stanlib.
Budget 2020 – Public finances are spiralling out of control and risk compromising service delivery in the Western Cape
By David Maynier*
The Minister of Finance, Tito Mboweni, has lost control of our public finances and provinces will have to absorb significant budget cuts over the medium term to bailout zombie state-owned enterprises, which risks compromising service delivery in provinces like the Western Cape.
The fact is that provinces will have to absorb a R7.3 billion reduction in equitable share, a R18 billion reduction in conditional grants and part of the proposed R160.2 billion reduction in the public sector wage bill, over the medium term between 2020/21 and 2022/23.
However, the full horror of national government’s mismanagement of our public finances is reflected in the fact that, despite imposing significant budget cuts on provinces, national debt still spirals out of control over the medium term to a terrifying R4.38 trillion, or 71.6% of GDP, in 2022/23.
To put this in perspective, national government will be spending R290 billion on debt service costs in 2022/23, which is a staggering R239 billion, or 5 times, more than we will spend on delivering frontline services such as education, health and social development this financial year -2019/20 – in the Western Cape.
We will do everything possible to protect spending on frontline services such as education, health and social development in this province and we will be setting out our response when the budget is tabled in the provincial legislature on 10 March 2020 in the Western Cape.
- David Maynier is the Western Cape minister of finance and economic opportunities.
Budget offers positive economic remedies but unfinished business on national agenda
By Raymond Parsons
The Budget confirms the extent to which the SA economy still finds itself in a bad space, requiring a strong emphasis on measures to boost job-rich growth.
Finance Minister Tito Mboweni’s 2020 Budget Speech was seized with a greater sense of urgency about the critical economic and fiscal challenges faced by SA and offered a difficult balancing act for addressing them in what have become very stressful economic circumstances. It also highlighted the need for collaborative leadership among government, business and labour.
Given the consequent pressure on state revenues, the substantial Budget commitment to reduce the public sector wage bill is a very important economic and political step towards creating a better balance between government current spending and its investment outlays. It is welcome that there have been no personal or corporate tax increases, and in fact some tax reductions, as a recognition of the fact that diminishing returns have set in from expecting more revenue from yet higher taxes.
The impact of the various proposed Budget remedies will continue to depend heavily on successful and tangible implementation of the planned policy steps, including the turnaround in key dysfunctional state-owned enterprises such as Eskom. Lack of security in energy supply is recognised by the Finance Minister as a major constraint on growth.
The downside risk in the Budget nonetheless remains the growth in public debt and the need for continued fiscal discipline, given the deteriorating debt arithmetic strongly reflected in the Budget numbers. This trend continues to present policy makers with difficult choices, but choices that cannot be avoided or easily postponed. The roles of the State Bank and the Sovereign Wealth Fund respectively will also require to be further interrogated to see what value they could play in promoting economic development and how they should be capitalised.
What clearly again shines through the fiscal gloom of recent years is the need for a dramatic and sustainable rise in SA’s flagging growth rate by boosting investor confidence and turning the economy around. Taking the Budget decisions as a whole it remains an open question as to whether enough has been done to fend off a Moody’s investment downgrade, which is likely to be a close call in the light of the economic and fiscal cross-currents reflected in the Budget’.
- Prof Parsons is an economist at the NWU Business School.
Sugar tax decision offers glimmer of hope to sugar industry
By Rex Talmage*
Finance Minister Tito Mboweni’s decision not to hike the sugar tax in his budget speech offers a glimmer of hope to those who depend on the sugar industry for their economic survival.
The sugar tax has already cost the industry R1.5bn, with 9000 jobs being lost in the cane growing sector alone. A tax hike would have resulted in thousands more jobs being lost in mostly poor rural communities.
While we are pleased that the national government did not give into to reckless calls by lobby groups such as HEALA to increase the sugar tax further, the tax still poses a serious risk to jobs in the sugar industry.
The only way we will be able to ensure the long-term sustainability of the industry, and to protect the one million livelihoods it supports, is for the sugar tax to be eradicated completely.
There is no evidence that the sugar tax works to curb obesity, but it is patently clear that the sugar tax kills jobs.
We will therefore continue our calls on national government to place a moratorium on the sugar tax until a full socio-economic assessment of its impact is undertaken.
Stopping this unnecessary tax is the only way the sugar industry can remain a long-term contributor to the South African economy and a job creator in rural communities.
- Rex Talmage is chairman of the SA Canegrowers Association.
More to follow …
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