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South Africa’s Supplementary Budget Review – sobering insights

Chief Economist, Kevin Lings shares his views on the potential impact of this sobering Supplementary Budget on individuals, markets, and the greater economy.
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Kevin Lings

Kevin Lings

Chief Economist

BCom(Hons)(Economics)

Kevin has over 30-years’ experience and is responsible for domestic and global economic research, and forecasts. Additionally, he provides input into STANLIB’s asset allocation processes and relevant economic research for our Fixed Income, Property and Equity teams.

Key takeouts 
  • Tax revenue forecasted to be R304 billion less than expected in February Budget
  • Government will have to borrow more as the forecasted debt/GDP ratio is now 81%, compared to 63% in February this year
  • Projected budget deficit/GDP in February was 6.8%, compared to a projected deficit of 14.6% in today’s Supplementary Budget
  • Debt servicing cost has become one of Government’s largest budget allocations, coming in at around 21% of total expenditure
  • In addressing Government debt, two scenarios were highlighted:
    • A passive scenario which could see the debt/GDP ratio go to 120% in five years’ time, potentially resulting in a default
    • An active scenario which will require structural reform, zero-based budgeting and political will

South Africa is expected to record its worst economic performance in recent history, due to the COVID-19 pandemic and subsequent lockdown measures.

 

As a result of this, government introduced a three-phase economic response to mitigate the impact of the virus. This has necessitated the release of today’s Supplementary Budget Review, where the Minister of Finance presented a stark budget reality.

 

Today’s emergency Budget dealt mainly with the second phase of the government’s economic response – the introduction of a R500 billion fiscal stimulus package on 21 April to support both households and businesses. However, given the far-reaching impact of COVID-19, all aspects of the National Budget that was presented by the Minister in February 2020 needed to be revised for the Budget to remain relevant.

 

GDP forecast down

 

The National Treasury has revised down its economic growth forecast considerably.

 

In the February 2020 Budget, government had forecast a GDP growth rate of 0.9% in 2020, rising to 2.1% in 2021, before easing to 1.6% in 2022. Given the global and domestic supply and demand shocks from COVID-19, and to a lesser extent, the lack of progression on structural reforms, the National Treasury now expects GDP growth to be -7.2% in 2020, 2.6% in 2021 and 1.5% in both 2022 and 2023. The National Treasury notes, however, that should government make a concerted effort to implement the needed reforms, economic growth could exceed these estimates in the longer term.

SOUTH AFRICA GDP GROWTH FORECAST – GOVERNMENT ESTIMATE

Inflation is expected to fall

In terms of inflation, today’s Supplementary Budget shows that prices are expected to moderate significantly in 2020. Inflation is expected to fall to 3.0% from 4.1% in 2019, before increasing to 4.5% by 2023, more or less in line with estimates by the South African Reserve Bank (SARB).

These inflation projections are important as they will have a critical effect on the outcome of the upcoming 2021 wage negotiations.

 

Public sector wage bill control needed

Unfortunately, the reopening of the public sector wage agreement has not achieved government’s desired outcome. It seems clear that in for government to achieve its target of controlling the wage bill over the next two years, they would need to ensure that the new wage agreements are as close as possible to expected inflation.

 

Reduced tax revenue collection

National Treasury has projected that government will only collect R1.12 trillion in tax revenue in 2020.

 

This is a massive R304.1 billion below the budgeted tax revenue presented in February’s Budget. This reduction implies that total revenue will decline by 17.3% year-on-year during the current tax years vs a budgeted increase of +5.1% at the time of the February 2020 Budget.

 

This will be South Africa’s worst tax performance since at least 1996. While no new tax policies were proposed in this budget, the National Treasury pencilled in tax increases of only R5 billion in 2021/22, R10 billion in 2022/23, R10 billion in 2023/24 and R15 billion in 2024/25.

SA BUDGET REVENUE OVER-RUNS/UNDER-COLLECTION

The tax revenue shortfall of R304.1 billion has been affected by two things:

  1. The tax relief measures implemented to combat the economic effects of the lockdown will result in a loss in tax revenue of about R70 billion
  2. The negative economic growth expected this year will have a dire effect on tax revenues

While no details were given in terms of numbers, the areas of tax that will be affected the most will be the largest tax bases. These are:

  • Personal income tax (job losses)
  • Corporate tax (service and production closures during the lockdown)
  • VAT (lockdown-related sales restrictions and a much weaker trade outlook)

Reprioritisation still leads to increased expenditure

In funding some of the COVID-19 stimulus package, government committed to redirect R130 billion within the current budget. As such, departments were required to identify programmes/activities that could be temporarily suspended without negatively affecting the longevity of those programmes.

 

In this respect, government was able to free up R109 billion from the 2020 Budget by removing underspent funds, delaying some departmental projects to 2021/22, and by suspending allocations to programmes with a history of poor performance.

 

Despite this reprioritisation, however, higher expected expenditure to tackle the effects of COVID-19 is expected to result in a net increase of R36 billion in main government expenditure for 2020/21 relative to the February 2020 Budget.

 

Most of the proposed upward expenditure adjustments are expected to be spent on supporting vulnerable households for six months. It is expected to also provide health and education services like water and sanitation to households and schools, provide personal protective equipment to schools and fund continual deep cleaning activities of public areas.

 

Growing debt/GDP ratios

This, together with the massive tax revenue shortfall has pushed the National Treasury’s projected main budget deficit from an initial estimate of -6.8% of GDP to -14.6% of GDP in 2020/21, moderating to ‑7.7% by 2022/23 (compared to -5.7% in the 2020 Budget).

SA BUDGET DEFICIT AS % OF GDP

As such, the increased borrowing requirement is expected to push up government debt from 63.5% of GDP in 2019/20 to 81.8% of GDP in 2020/21. By 2022/23, it is expected to increase further to 87.4% of GDP. The government has also set a target to reach a primary surplus by 2023/24.

SA DEBT OUTLOOK SCENARIOS

Outlook: an active plan required

 

According to the National Treasury, however, these targets are only possible if government adopts the active scenario. This scenario entails stabilising debt, increasing the efficiency and composition of public spending, and implementing cross-cutting reforms to boost long-term growth. The February 2020 Budget had projected government debt to GDP to be at 65.6% in 2020/21, rising to 71.6% by 2022/23.

 

Other than accessing the domestic capital market for funding, government expects to also draw down on its sterilisation deposits and borrow around US$7.0 billion from international financial institutions. This planned borrowing includes a US$1 billion loan from the New Development Bank and US$4.2 billion through the IMF’s rapid financing instrument. However, no details have been given regarding these funding sources.

 

If the government does not embark on a process of structural reform timeously, the government debt to GDP ratio could breach 100% of GDP by 2023/24.

 

Such a breach will set the country on course for a fiscal crisis and a possible debt default. In other words, South Africa would face a substantial sovereign debt crisis and would have extreme difficulty financing its own spending requirements, forcing the country to seek even greater external funding that would be accompanied by stringent loan conditions.

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