Budget 2020: as good as can be expected

Intent to better manage government expenditure – but can government deliver?

 Budget 2020: as good as can be expected

Finance Minister Tito Mboweni’s 2020 National Budget speech was as positive as it could have been given the current economic climate. While his message of consolidation, reform and growth may not be enough to avert a ratings downgrade by Moody’s next month, the Rand reacted relatively positively to his speech.

Essentially, the minister only had two options: increase tax or cut government spending. South Africans, however, are already over taxed and in a low growth economy, further tax hikes are likely to have been counterproductive and would have served only to slow economic growth even further.

He was therefore left with only one option: to reduce government spend. As such, the minister plans to cut government expenditure by R261 billion over the next three years including cutting R160 billion from the public sector wage bill. Cuts on different government department budgets indicate that spending is out of control.

The minister referenced the fact that growth in public sector wage bill has crowded out spending on capital projects for future growth and items that are critical for service delivery, pointing out that the salaries of civil servants had grown 40% in real terms over the past 12 years “without equivalent increase in productivity”. There will undoubtedly be pushback from trade unions regarding the proposal to cut the public sector wage bill.

On a positive note there is some small tax relief for individuals and corporate tax is unchanged. The minister alluded to the fact that he would be looking to reduce corporate tax in the long term in order to allow businesses to become more competitive globally. Personal income tax remains the biggest source of income to the fiscus, contributing 38% of total tax.

In an encouraging move, an additional R2.4 billion has been allocated to the National Prosecuting Authority, the Special Investigating Unit and Directorate for Priority Crime Investigation to fund around 800 investigators and 277 prosecutors to assist with clearing the backlog of cases, including those emanating from the Zondo Commission.

The good news, perhaps not surprisingly, ends there. While revenue is expected to grow by 4.9% to R1.58 trillion, expenditure is forecasted to grow to R1.95 trillion, leaving a consolidated budget deficit of R370.5 billion. Gross national debt is projected to be R3.5 trillion, or 65.6% of GDP by the end of the 2020/21 fiscal year. The fact that this is the largest budget deficit – the difference between spending and revenue – the country has experienced in the last 28 years is very concerning. Servicing debt absorbs 15.2% of government revenue.

Struggling state-owned entities continue to be a drag on the fiscus with R112 billion allocated to Eskom over the next three years while R16.4 billion has been allocated to South African Airways to settle the airline’s liabilities and interest.

The budget provided very little detail on plans around privatisation of state-owned entities or turnaround strategies to return them to profit. In particular, there was no discussion around how Eskom’s ballooning debt would be addressed.

While the minister made no reference to Cosatu’s debt relief plan for Eskom during his budget speech, he did make mention of it during the media briefing preceding his speech, saying that while the Cosatu plan was not a bad one, he was more interested in a plan that included all pension plans. This leans alarmingly close to the prescribing of assets which would be a major concern and act as a further deterrent to personal savings.

There was little detail provided on government’s ‘big dream’ items.  The new state bank, said the minister, would be launched as a retail bank operating on commercial principles, would be subject to the Banks Act and have “an appropriate capital structure and performance parameters on investments and loan impairments. The big question will be how a state bank will be capitalised, given that banks operating on commercial principles have significant capitalisation requirements.

There was likewise little detail provided around the Sovereign Wealth Fund, which the minister said would be created with a target capital amount of R30 billion. Where this funding will come from remains to be seen although the minister did suggest possible funding sources as the proceeds of spectrum allocation, petroleum, gas or mineral rights royalties, the sale of non-core state assets, future fiscal surpluses and money set aside from future budgets.

No mention was made of the National Health Insurance or how it would be funded, indicating perhaps that this too is a longer-term objective.

What will be key to watch in the months ahead is whether the political will is in place to follow through on politically sensitive issues such as reducing government expenditure. In particular, will government be able to stay the course in the face of push back from trade unions?

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