The Finance Minister delivers an ambitious Medium-Term Budget Policy Statement that will shift government’s priorities, and slash spending.
Finance Minister Tito Mboweni delivers his Medium-Term Budget Policy Speech in Parliament on 28 October 2020 in Cape Town. Picture: GCIS
CAPE TOWN – Finance Minister Tito Mboweni has a deeply unenviable task – the political face of a budgetary process that will further alienate and inflame organised labour, attempt to extract efficiency out of bureaucracy, and balance the need to cut government spending, whilst simultaneously funding a massive infrastructure build plan, aimed at kick starting the economy.
This year’s Medium-Term Budget Policy Statement (MTBPS) was delayed by a week – an unprecedented move, to allow time to address government’s economic recovery plan – announced earlier this month by President Cyril Ramaphosa.
The MTBPS documents reveal, in black and white, what most South Africans already know – the situation is pretty bleak. Our nation is deeply indebted, our economy is shrinking, and millions are out of work.
At the moment, we use 21 cents out of every rand just to pay the interest on our existing debt, and while there’s an expectation that the economy will bounce back, Treasury is warning of a rocky road to any kind of recovery, saying the pandemic will result in a “highly uneven” recovery, that could be interrupted by fresh infection waves.
Treasury expects the economy to contract by 7.8% in 2020, and bounce back a little next year, growing at 3.3%. However, it’s only expected to recover to pre-pandemic levels (which were not exactly robust) in 2024.
Tax revenues will decline by R312.8 billion this year, and the deficit has more than doubled, from 6.4% of GDP in the 2019/20 financial year to 15.7% this year. The nation’s debt level is now sitting at a staggering 81.8% of GDP, up from 63.3% in 2019/20. Interest payments alone will chew up 4.8% of GDP. This is going to get even worse, with Treasury predicting gross national debt will even out at 95.3% of GDP by 2025/26.
Treasury believes the economy will bounce back in the medium term, predicting real GDP growth of 2.1% on average over the next three years.
But, there’s a lot that can’t be predicted – for instance, if another wave of infections hits, and a harder lockdown is needed, the recovery will be set back.
Now the key is to close the budget deficit gap and stabilise debt. To this end, Treasury is looking at a raft of measures – both cost cutting and revenue collection related, to try and narrow the deficit from 15.7% of GDP this year to 7.3% in 2023/24. It’s an ambitious goal, and making it all work will take a massive effort – both on the spending side, and the revenue collection side.
Speaking at a webinar to mark the centenary of Stellenbosch University’s Economics Department earlier this month, the Finance Minister likened the economic situation to the gaping mouth of a hippo, and warned South Africa needed to stop spending at the rate that it was, or face a fiscal crisis down the road.
The MTBPS looks to cut R300 billion of non-interest spending over the next three years. Much of that saving will come from the wage bill. There’s also a promise to try and protect the spending needed to drive the centerpiece of the economic recovery plan – a massive infrastructure build.
On the revenue side, Treasury is sticking to the plan it released in June, in the special adjustments budget, that will see tax increases of R5 billion in the coming financial year. They’ll add an extra R10 billion in taxes in 2022/23 and 2023/24 and R15 billion in 2024/25. There’s been no indication as to where exactly those taxes will come from.
The plans are, once again, uncertain – Treasury can’t predict the exact speed of the recovery, or the timing of it, and without a recovery in growth, there will be no recovery in revenue collection. Timing is also not entirely predictable on expenditure side either: the bulk of savings hangs on cutting the public wage bill, and the associated legal process likely to be protracted.
So how will government spend the money that we have? The plan is to shift priorities from consumption spending – things like wages – and use that money, instead, for projects that spur growth.
Spending priorities remain in the social sphere – Education, Health and Social Development will get the biggest pieces of the pie. But there will be cuts to the Health budget allocation over the coming three years, specifically in the money allocated to provinces, which will require major restructuring and rethinking of provincial health services
In a nation where so many are unemployed, an adequate social safety net is vital, so to bridge the gap between the current reality and hopefully, a brighter future, money has to be set aside to protect incomes, and underpin social welfare. An additional billion rand has been allocated to ensure food security for the poorest citizens.
In terms of funding the economic recovery, government will prioritise spending on economic development, with a special focus on boosting tourism. The short-term tourism relief fund will be extended to mid-2021 to help small operators access working capital. In the medium term, government will set aside R540 million for a tourism equity fund to support black-owned and commercially viable enterprises to acquire shares in tourism enterprises.
Treasury also wants to move to a system of zero-based budgeting, where each year begins with a fresh slate for departments. Since June this year, Treasury has been looking very closely at how wisely and efficiently money is being spent. They’ve concluded – not unsurprisingly – that the South African citizen is not getting bang for their buck, when it comes to what is actually delivered. Preliminary findings suggest that there’s a lot of overlap, where different institutions share responsibility for projects, meaning the same work is done twice, and paid for twice. They also note that policies are often adopted without any clear understanding of how much they will cost to implement. When it comes to big ticket items like IT infrastructure, Treasury has noted government overpays for many services.
They believe starting afresh with this knowledge, and crafting budgets from scratch will eliminate at least some of the wastage, and these reviews will form the basis for the zero-based budgeting approach to review baseline allocations in the 2022 Medium Term Expenditure Framework period.
Treasury is also proposing serious high level policy discussions around 7 key programmes – saying they will require some difficult decisions – they include the funding of post school education, the subsidisation of urban public transport, the structure of the Human Settlements delivery programme and how to contain the public wage bill, as well as how to most effectively protect the vulnerable in our society.
In terms of structure, officials want to discuss how functions are assigned to the three spheres of government, and whether we need as many departments ministries and public entities as we currently fund. The latter point was raised by the Finance Minister in his first year in the job, when he suggested an ideal cabinet size of no more than 25 ministers.