With South Africa in a deep recession and at risk of entering a debt crisis, it was expected that the emergency budget delivered yesterday by the minister of finance, Tito Mboweni, would show that big and hard decisions had been taken.
The budget speech contained dire warnings about the debt burden and commitments to deal with the ongoing crisis in October when the Medium-Term Budget Policy Statement is presented. With no tough measures taken, and the delay on key budget measures until October, the Rand fell about one percent against the dollar when the Minister spoke.
Had a few key decisions been delivered yesterday, a measure of confidence would have been instilled. Tito Mboweni is a fiscal conservative, but he might well be having problems getting through to the rest of Government and the party on the urgency of spending cuts. That has to account for the delay in making big decisions. If these are not taken by October, the currency and South Africa’s government bonds are certain to be punished.
Treasury projects the economy will contract by 7.2 percent this year, which is less of a fall than the 10 percent forecast by some private sector economists. Public debt will be close to 82 percent of GDP and tax revenue will take a sharp fall this year.
All the key budget indicators have sharply deteriorated since February. Now Mboweni expects the government budget deficit will reach 15.7 percent of GDP this financial year. The pre-Covid-19 projection was for a deficit of 6.8 percent of GDP, a level that is already deep into crisis territory. About 22 percent of taxes will go toward debt service, rather than government services.
This emergency budget was expected to detail R130bn in cuts in the February allocations to make way for spending repurposed to be part of the R500bn Covid-19 emergency package. Despite the intention to come up with R130bn in cuts, spending in total, due to new commitments, will rise by R36bn.
Mboweni said the introduction of zero-based budgeting, which means a justification will have to be given for programmes each year, will help cut costs.
Dealing with public sector pay, which takes up about half of all government revenue, is key to dealing with South Africa’s public finance mess. Negotiations with the unions are under way, the Minister said. In February, the budget proposed savings of R160bn through cuts in the projected increase in public sector wages over three years. In the present climate, there could be a bitter fight with the unions over actual cuts, rather than cuts to planned pay rises.
More tax revenue required
The aim is now is to find total cuts of R230bn in total spending over two years. That would amount to about 15 percent of the planned total non-interest spending this financial year. To achieve the goal of having the debt-to-GDP ratio decline from 87.4 percent in three years’ time, more tax revenue is required. We will only hear about the plans for taxes next year.
There were also hints yesterday those structural reforms to boost growth which Treasury proposed in “Toward an Economic Strategy for SA” are on the way. ‘A shift away from the electricity supply system that was introduced in 1923’, is in the offing as part of a structural reform agenda, the minister said.
This is another delay in dealing with the crisis, which means there is now less time to deal with a fast deteriorating situation.
The views of the writer are not necessarily the views of the Daily Friend or the IRR