South Africa’s revised budget – snapshots
Debt crisis: The mouth of the hippopotamus
Beyond 2020/21, government has considered two scenarios: a passive approach, in which South Africa continues on its current trajectory and debt spirals out of control; and an active scenario, in which major reforms and fiscal consolidation are implemented rapidly to stabilise debt in 2023/24.
In the passive scenario, economic growth recovers but remains low, debt spirals upwards and debt-service costs crowd out public spending on health, education and other policy priorities. Rising debt, and the possibility that government will be unable to repay it, leads bondholders to require higher returns, pushing up debt-service costs. A weaker currency, lower confidence and capital flight reduce GDP growth and revenue collection.
Cabinet recognises that this scenario is not a viable option for South Africa and it is presented here for illustrative purposes only. In the active scenario, government stabilises debt through a combination of reforms that boost economic growth and measures to increase revenue collection and lower expenditure.
Cabinet has adopted the active approach. It has endorsed the target of a primary surplus by 2023/24, meaning revenue will exceed non-interest expenditure. This will require spending reductions and revenue adjustments amounting to approximately R250 billion over the next two years. These measures require difficult choices that will affect the economy and distribution of public resources. The 2020 MTBPS will set out these proposals in detail.
Soaring unemployment, plummeting economic growth
Eskom, Electricity usage, business confidence
International Monetary Fund: Debt-to-GDP forecasts
Global economic outlook: Where South Africa fits in
In June, the World Bank forecast a 5.2 per cent contraction in global GDP in 2020. This would mark the deepest global recession since the Second World War, and the broadest collapse in per capita incomes since 1870.
GDP, inflation projections: South Africa to 2023
After a decade of slow economic growth, the impact of COVID-19 on real income levels is likely to set the South African economy back several years.
Shrinking SA tax pot
How Covid-19 has hit all the sectors: Stats SA
Statistics South Africa (Stats SA) data shows that for the first two weeks of April, nearly 90 per cent of businesses reported below-normal turnover, 48 per cent ceased activity temporarily and 9 per cent permanently closed operations. Business confidence in the second quarter of 2020, as measured by the BER/RMB index, reached its lowest level since the series began in 1975.
How households are struggling to cope in the Covid-19 era
Since March 2020, consumers at all income levels have reduced spending. The crisis is likely to have increased hardship particularly for those in informal or low-skilled jobs. Reduced activity has led to sharp downward pressure on pricing power for the most essential goods. Restrictions are now easing, enabling firms to do business and giving more workers the opportunity to earn a living. There has been a recovery in activity, for example in electricity usage, but levels remain low relative to 2019.
Debt service costs: “without urgent action, a debt crisis will follow”
Even as South Africa responds to the current health and economic crisis, a fiscal reckoning looms. The public finances are dangerously overstretched. Without urgent action in the 2021 budget process, a debt crisis will follow. Failure to contain ballooning debt and debt-service costs, and narrow the budget deficit, would damage the country’s long-term economic prospects. Over the medium term, compensation and debt-service costs would be the largest expenditure items, and outstrip the investments government makes in human capital, social and economic infrastructure, and service delivery. As Figure 1.1 implies, rising public debt means that an ever-increasing share of tax revenue is transferred to bondholders.
Improved tax will boost the country’s coffers
Main budget fiscal framework
Main budget revenue is projected to decline as a share of GDP from 26.2 per cent in 2019/20 to 22.6 per cent in the current year.
Main budget expenditure is projected to increase to 37.2 per cent of GDP in 2020/21, reflecting support provided to state-owned companies in the 2020 Budget, COVID-19 spending and higher debt-service costs. Projected tax revenue shortfalls, lower GDP and higher spending as a result of the pandemic will lead to a significant increase in the main budget deficit in the current year. The main budget deficit, estimated at 6.8 per cent of GDP in the 2020 Budget, is now projected to reach 14.6 per cent of GDP.
The primary deficit — the difference between revenue and non-interest spending — widens to 9.7 per cent of GDP in 2020/21.
Revisions to main budget spending plans for 2020/2021
Spending was adjusted by:
- Removing funds underspent due to delays caused by the lockdown from the baselines of affected departments.
- Suspending allocations for capital and other departmental projects that could be delayed or rescheduled to 2021/22 or later.
- Suspending allocations to programmes with a history of poor performance and/or slow spending.
- Redirecting funds towards the COVID-19 response within functions, or towards government’s fiscal relief package.
Changes to provincial, local governments
The national share for 2020/21 increases from 49.2 per cent to 50.1 per cent, the provincial share decreases from 42.2 per cent to 41 per cent, and the local government share increases from 8.6 per cent to 8.9 per cent.
Provinces and municipalities are reallocating their own budgets to complement this national adjustments budget. These changed budgets are the result of adjustments to transfers from national government in the Division of Revenue Amendment Bill, significant declines in own revenue collections and new expenditure priorities.
Details of the provincial reprioritisations will be included in provincial adjustments budgets. At least R15 billion is expected to be reprioritised to increase capacity in the public health system, and at least R5 billion will be used to augment the education catch-up plan, social welfare support for communities, provision of quarantine sites by public works departments and responses in other sectors.
COVID-19 tax relief measures
- An increase in the employment tax incentive by R750 per month for eligible employees and a further R750 per month incentive for all other employees who earn less than R6 500 per month from 1 April 2020 to 31 July 2020.
- A 35 per cent deferral of employees’ tax liabilities (pay-as-you-earn) for businesses with a gross income of up to R100 million for four months from 1 April 2020.
- A 35 per cent deferral of the first or second provisional tax payments to be made between 1 April 2020 and 30 September 2020, and of the second provisional tax payment to be made between 1 October 2020 and 31 March 2021 for businesses with a gross income of less than R100 million.
- A four-month exemption in the skills development levy from 1 May 2020.
- A 90-day deferral for payments of alcohol and tobacco excise duties from 1 May 2020.
- A three-month postponement of the filing and payment date for carbon tax liabilities to 31 October 2020.
- Postponement of measures to broaden the corporate income tax base (restricting net interest expense deductions, and limiting the use of assessed losses carried forward) to at least 1 January 2022.
- A four-month 10 per cent increase in the available tax deduction for donations made to the Solidarity Fund from 1 April 2020.
- Consideration of applications to the South African Revenue Service, on a case-by-case basis, to defer tax liabilities without penalty if the business can show it is incapable of making payment due to the pandemic. The measures were included in the Draft Disaster Management Tax Relief Bill and the Draft Disaster Management Tax Relief Administration Bill published for
Helping the desperate: Covid-19 grants cost R41bn
To date, more than 18 million South Africans have received temporary COVID-19 grants, which – along with other interventions for vulnerable households – will cost about R41 billion. In its first few weeks of operation, the COVID-19 loan guarantee scheme had provided small businesses with over R10 billion worth of loans.
Provinces brace for drop of R4bn in revenue
Provinces are anticipating a decline in their own revenues of approximately R4 billion, or 18.7 per cent of the amount tabled in their 2020/21 budgets. Tax receipts from casinos and horse racing have declined. Fees paid for public health services have also fallen, as fewer patients are accessing nonCOVID-19-related health services.
