Minister of Finance Tito Mboweni presented a rescue budget aimed at reversing the trajectories of soaring unemployment and plunging economic growth. He outlined two options for South Africa as it stares in the face of an open-mouthed hippopotamus. Mboweni said Cabinet has adopted the “active” approach, with a target of a primary surplus by 2023/24. “This will require spending reductions and revenue adjustments amounting to approximately R250bn over the next two years. These measures require difficult choices that will affect the economy and distribution of public resources,” he cautioned on Wednesday. In this discussion, BizNews founder Alec Hogg and Stanlib Chief Economist Kevin Lings examine whether South Africa can emerge stronger after its battering by Covid-19 containment measures. – Editor
Finance Minister Tito Mboweni presented his supplementary budget today. It is a bridge between the February budget and the medium-term budget that comes in October and what a bridge it is. It shows that the collections of revenue of taxes are going to be R300 billion lower than there had been anticipated just a couple of months ago and that is because of the impact of Covid-19 and the lockdown in particular.
___STEADY_PAYWALL___
Just to put it in perspective, it’s about 25 cents in every rand that had been anticipated to be collected through taxes. That won’t be coming into the coffers anymore. This leaves a very big hole, a hole that is going to be covered through borrowings. I got hold of Kevin Lings, who’s the chief economist at Stanlib, to get some insight into, first of all, the big problem that he identified yesterday from the Stats SA figures that we now have 70% of people under 25 of a working age who are unemployed. Secondly, what does the government do to get South Africa out of the hole that we now find ourselves in? Here’s Kevin.
I know that the headline unemployment rate only declined by 1%, but you look at the number of people that joined the ranks of the unemployed, that was almost 900,000 people. What I think we’re missing to some extent with the labour market discussion is that it’s not just about the number of people that have a job who have lost their job. It’s about the number of people that are entering the labour market every single year and that if you don’t accommodate those people, then obviously the situation just deteriorates.
That’s essentially what is happening. So we need to create roughly 600,000 jobs a year just to keep pace with the population. Obviously, we’re doing nothing like that, as a result, the number of people unemployed is now over 7 million, and that excludes the discouraged workers, which is almost up at 3 million. In total, we pretty much looking at 10 million people that are unemployed. Then if you break it down, according to age, the youth unemployment rate officially 59%, but you add back discouraged youth.
The number jumps to 70%. To me, you’ve got to add in the discouraged workers simply because those are people who are wanting a job are available to work, all they’ve done is stopped looking for work because they’ve become despondent that they never find a job. It’s a relevance statistic which means youth unemployment of 70%, that is a major problem for any economy.
Indeed, listening to the budget discussion today, there was even worse news on that front because the director-general of the Treasury used the figure of 10 million unemployed and he said that if you add the data that StatsSA did not put in. So it looks like we’re in very much a crisis situation but, of course, it’s still just been made a whole lot worse by Covid-19.
That’s right. So that’s all measured before we see the impact of Covid-19. That was the latest employment numbers relate to the first quarter of the year. We went into lockdown on the 27th of March and so the survey was done before the impact of the lockdown or the severe impact of the lockdown. There’s no doubt that many businesses, particularly small business, have failed in the last few weeks.
There’s also no doubt that informal business has come under enormous pressure. So a whole lot of additional people have lost employment. I suspect when we see the next update on those employment numbers, it’s going to look a hell of a lot worse, all of that is going to be telling the government that their social grant payments are going to escalate because ultimately we’re going to have to provide some sort of safety net for the unemployed. It just adds to the pressure on government finances.
Kevin, with today’s supplementary budget, we were told that there’s an undershooting of R300bn in the tax receipts and that there’s another R40 odd billion that net that needs to be paid. So net-net, South Africa is going to have to find R350bn to fight the Covid-19 virus. Is this the kind of number that you had in mind?
That’s way worse than what we were expecting and what most people were expecting. I didn’t expect a revenue shortfall that went out to 300 billion that would suggest that every area of tax revenue is well behind and that all the areas are falling substantially further than what would have been envisaged by any scenario. I would say in the private sector. We do know that things like tax revenue for alcohol, cigarettes, we know that’s behind. Clearly, tax is a big risk because obviously over time, corporates will make less profits and therefore the tax receipts will dwindle.
We’re not importing as much import duties come under pressure. We’re not spending as much in the shops so VAT comes under pressure. So, yep, that’s what the minister saying, 300 billion tax revenue shortfall. Obviously, we can’t make that up. That’s impossible. Which means that government spending has to be reprioritized to some extent, but you can’t re prioritise that much.
Ultimately, the government’s going to have to borrow the shortfall. Government’s deficit goes to 14.6% of GDP and if you think every 1% of GDP in South Africa is roughly 50 billion, just to get an order of magnitude in your mind, that’s a huge amount of money that government now has to borrow that we weren’t banking on at the time of the February budget.
So clearly, that’s going to shoot government debt up dramatically. The minister is saying government debt is now going to 81% of GDP and just a year ago it was 63%. 63%, quite frankly, was already exceptionally high so 81% for a country like South Africa is extraordinary. Clearly, we’re are doing a lot of damage, but we were under pressure to start with. To go into Covid from a point of weakness clearly made it a whole lot worse.
The big question is, how do we get out of here? Some of the better news was that had there not been interventions, according to Treasury, that debt to GDP would have gone over 100%. Just starting there, is that an end of the game kind of situation, debt trap, if you go over 100%?
Yes. Well, I think we in a debt trap now in the sense that the cost of servicing the debt is rising fast, faster than, say, tax revenue or any other component of the budget. The minister did point out that the interest cost, just the interest cost alone is now 21% of government expenditure. That means it’s pretty much becoming the single biggest component of the government’s budget.
If the debt levels ramp up further from here and let’s say they got to 100% at that point, you are in a major financial crisis and you would have a couple of problems. One is, are you able to fund it domestically? In other words, simply is there enough money within the economic system to fund the government and there’d be a big question mark about that. The second is your debt servicing cost is going to result in you having to take money away from just about every government department just to service the debt, which means the effectiveness of government would come under enormous pressure. Coupled with all of that would be the risk of default.
In other words, you’re simply unable to borrow enough money to repay your debt. At that point, you would be forced into default or forced to go to an agency like the IMF for additional funding. So, yes, if we don’t do anything, what the is saying is that we heading into a major financial crisis that would result in South Africa ultimately defaulting or requiring a very substantial external bailout. What the minister’s trying to urge government and anybody who’s interested is that we’ve got to make substantial reforms now in order to change the debt profile. We’ve also got to implement structural adjustments in South Africa to try and get the growth rate up and without that, we do have a significant crisis.
The structural adjustments that have already been proposed, the so-called Tito plan or Treasury plan, where it reallocates a lot of the support to sectors like tourism, agriculture, infrastructure, rebuilding SARS, helping with the transport rails, ports, etc., and gets to zero-based budgeting. Is that a plan that in your mind can work?
On paper, it’s workable. When we looked at the Tito document, we thought that it was a very firm step in the right direction in terms of the structure of that document, the initiatives that he was putting forward. I think many of those elements are exactly what people in the private sector, for example, would come up with, what people at the IMF would come up with anybody who’s looking at South Africa and other countries that are in a similar position would recommend. I think it is a workable type of policy intervention.
The question is, can you implement it? Have you got the political will to implement it? Secondly, over what timeframe can you make start to make a difference? It’s very clear to me that right now we still have a lot of ambiguity around the policy direction. The types of things that the minister of finance is talking about is not necessarily shared by all senior members within the government or within the ANC broadly.
There are competing policy initiatives out there, so we would have to simplify it otherwise, we just create ongoing confusion and do we have the institutional capacity to implement these types of reforms timeously? So it’s a huge job ahead. Again, the minister saying, time not on our side, literally every month it rolls past that we’ve got no growth, no jobs, no tax collection.
The situation’s just going to get worse. I’m hoping that I thought he came across as being very clear that this is a crisis. I’m hoping that it does galvanise political action and it does result in real, genuine reform. Clearly, what it does set up is that by the time we get to the medium-term budget in October, there has to be a very clear road to implementation of many of these types of reform initiatives. Otherwise, it’s hard to imagine that South Africa starts to turn the situation around. So it’s a difficult time.
The DG of Treasury has said that this is a bridging exercise until the, what we used to call them mini-budget or the October budget, and then he said that in 2021 it would be set up for a really tough budget at that stage. What would a really tough budget be?
Yes, so this is just this adjustment, supplementary adjustment is to really just to get past the immediate problem and that is how do you adjust for the loss of revenue in terms of additional borrowing, how do you adjust for some additional expenditure. Beyond that, this is not doing much more. It is, of course, laying out the problem ahead and that’s got to clearly be articulated much further in the October medium-term budget. Then you’ve got to get to a point where you’re willing to implement these reforms.
For the government, that means things like no increases. You start to then at every government level allocating 0 increase and simply saying to each government department that you have to reprioritise, you have to have a firm control on employment. That means that you allow for natural attrition and you cannot employ additional people unless it is absolutely urgent. In other areas, you’re going to have to look to consolidate departments, consolidate functions, particularly within the broader SOEs. There are way too many SOEs.
You’re going to have to look at how you get rid of non-strategic assets. How do you engage more firmly with the private sector? There’s a whole range of things that would come into play if you’re going to get really serious about this. There’s no doubt that the government is too big for the economy. In addition to that, the activities that it’s undertaking are not generating economic growth.
It has to change the size, essentially get out the way, make itself smaller, be less involved, be sure more strategically involved, perhaps, but less involved. The second thing is to make sure that where it does get involved, it’s a lot more efficient, a lot more productive, and therefore it contributes a lot more to the economic performance of the country. Put it this way, go back to 2009.
In 2009, government debt was 26% of GDP, we are now talking about 80% moving higher. So since 2009, what did we achieve? What did we get for that increasing government debt? Normally, when you become that much more indebted, you must be able to show some sort of benefit for incurring that level of debt. In South Africa, you’re going to struggle to answer that question. What are you going to say? Is the unemployment rate increased, the economic growth slumped and the social situation deteriorated. A whole range of factors got worse. Yet you become a hell of a lot more indebted. What it’s saying is that the government’s got to find a way to utilise the resources way, way better than it’s doing at the moment.
