Mboweni to further tighten the belt in his budget

Finance Minister Tito Mboweni has already given the public a glimpse of what can be expected when he presents the country’s supplementary budget this Wednesday. Speaking to the National Council of Provinces last week, he said the country would have to tighten its belts even further to avoid a sovereign debt crisis by 2024. 

That scenario — where the debt to gross domestic product ratio is higher than the GDP — would be unprecedented in democratic South Africa and the country would have to look to the International Monetary Fund for fiscal support beyond Covid-19. 

The board of directors of the New Development Bank (NDB) has already approved a Covid-19 emergency programme loan of $1-billion and Mboweni is expected to outline how the money will be used.

Additionally, in a now deleted early Saturday morning tweet, Mboweni revealed that the government’s gross debt is expected to climb by 15% this year, from the projected 65.6% in February to 80.5%. 

To counter the economic fallout from Covid-19, Mboweni has said the government will adopt a zero-based budget approach, where government departments will be allocated funds according to needs and costs. 

One of the main items in the budget that Mboweni will need to show is how the R500-billion stimulus package announced by President Cyril Ramaphosa in April will be financed. The president said R130-billion will be reprioritised from the existing budget and the finance minister needs to show where the cuts will come from.

Analyst Peter Attard Montalto at Intellidex, a South African capital markets and financial services research house, says this process will be “moderately” easy in that there will be big money underspend from the fiscal first half of the year as a result of the lockdown, but also from programmes and infrastructure builds for the year that have been delayed. 

The zero-based approach has received stiff criticism from ANC alliance partner, Cosatu. The labour federation’s parliamentary officer, Matthew Parks, has described the approach as “political rhetoric and theatrics”. 

He says that “35% of the budget goes to salaries, others to capital expenditure etc. So it’s disingenuous to pretend that zero base is possible.” 

Mboweni is also expected to announce the government’s progress in slashing the public wage bill by R160-billion over the next three years. This proposal has received pushback from public sector unions. 

Parks says the “government needs to honour the 2020 public service wage bill. Public servants are risking their lives on a daily basis in the fight against Covid-19. Government must not pickpocket them.” 

Kevin Lings, the chief economist at Stanlib, says even if the government makes significant cuts in its spending, there are concerns that departments that were already struggling financially will be thrown into severe financial constraints. 

“It’s [the budget] going to be harsh. It’s going to be quite stark in terms of the deterioration in government finances,” he says. “I think it’s going to highlight that time is not on our side to try and lift growth and get  government finances in better shape.” 

Lings says the country is already in a sovereign debt crisis, but believes this can be changed if the government focuses on growth by creating employment and therefore generating tax revenue to grow the economy. He said this will make debt levels look better quickly.

Johann Els, the chief economist at Old Mutual Investment Group, also holds this view. He says the country may be forced to implement some much needed structural reforms to spur growth. 

“You can start cutting expenditure or raising taxes, but all those would hurt the economy even more. You need to adjust policies to get to higher economic growth,” he says. 

Some of these reforms would be to radically restructure state-owned enterprises or implement labour market deregulation, which would lift confidence in the market, he says. 

Another way, says Els, would be to look at how the government is spending its money so that it becomes more efficient. It should strive to make its expenditure meet its tax revenue collection — but it should couple this with adding other initiatives such as building partnerships with the private sector, because as soon as the government cuts expenditure the economy is restricted. 

Bernard Sacks, a tax partner at Mazars, says: “Whilst it may be tempting to raise tax rates in order to try to ‘balance the books’ this should be avoided.”

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