In his Adjustment Budget Speech Minister of Finance Tito Mboweni told us what we already knew. Debt is up and we need to borrow even more, spending will increase, government revenue will be less than expected, the deficit will increase, the economy is expected to contract, and unemployment is higher than usual.
This, to some extent, is unavoidable due to the COVID-19 pandemic, but we need to be careful because we face very high economic risks. The Minister did, however, put numbers to these expectations.
The government intends to borrow R121 billion from international finance institutions. Its debt levels will rise to 81.8% of GDP by the end of this fiscal year. This is compared to an estimate of 65.6% of GDP projected in February. That is a per capita debt of about R183,000 this year – 18% up from the R155,000 it was in February.
Government aims to stabilise debt at 87.4 percent of GDP in 2023/24 so the debt situation is going to get even worse.
In other words, if we were to work from the start of the year just to pay off the debt, we would only be finished on 17 October. Note the government has put in place a loan guarantee scheme which also increases the debt risk somewhat.
The Minister made it plain that our debt situation is serious. We have moved uncomfortably closer to a sovereign debt crisis. Short of that disaster there is also the danger that government will use up all the country’s savings, leaving nothing for enterprise to borrow for investment purposes, and thereby killing growth prospects.
Given the hit to the economy, the Treasury expects a revenue shortfall of more than R300 billion. That is at least 21% less than government aimed to collect. The consolidated budget deficit is expected to reach 15.7% of GDP for the current financial year – sharply up from February’s estimate of 6.8% of GDP.
Given that government is unlikely to reduce spending, that it has increased debt repayments, and that it is aiming for a primary surplus in 3 years, the shortfall needs to be made up pretty soon. If the shortfall is made up over 5 years, I estimate we can expect an increase in overall taxes of at least 7% of GDP within the next 5 years.
The Treasury expects growth to contract 7.2%, the largest contraction in nearly 90 years. This is substantially worse that February’s forecast of 0.9% for 2020.
The Treasury has not accounted for this contraction sufficiently when estimating revenue shortfalls because it seems to be assuming no more shortfalls after the first 3 months. Overall, we are heading for a situation where government will take almost half the income of the country. For a developing country like South Africa that will be catastrophic for growth prospects.
Without wealth, and therefore robust growth, the ability – in any political and economic system – to handle welfare and political challenges, ends.
During lockdown we witnessed the sort of thing that happens in a command economy where government can and does curtail freedom. We saw rampant excesses by the police and military, apart from the direct misery of losing liberty. We saw large increases to the opportunities for corruption.
Indeed, the Minister admitted that government relief efforts had been preyed upon by fraudsters.
Apart from detailing the economic risks and prospects South Africa faces, the Minister did address some specific policy measures. He told us that from July there will be zero based budgeting.
This implies that for spending on one cause to increase it will need to decrease on others. This is a good step, but one wishes this had been policy all along.
As part of the government programme to deal with the severe unemployment situation, he mentioned a number of ‘make work’ policies. He said that the salaries of public employees will use up almost half of consolidated revenue.
By the standards of economies the size of South Africa, that is an exceedingly large proportion of the budget, and possibly the worst in the world. South Africa desperately needs considerably fewer but more productive state employees.
Jobs that don’t add to total production do not add to welfare. Such jobs actually reduce welfare because now many people have to suffer working for the purpose of redistribution. It would be less harmful to just redistribute money directly. He said government would be embarking on road and bridge projects.
Given that increased infrastructure is productive, this is a much better ‘make work’ policy. One potential problem is that these policies may suck up resources that private enterprise could use more productively and could, therefore, result in a net loss of employment and production.
The Minister talked about what government aims to do with the state-owned enterprises that cost the country so much to keep operating. Actually, only one of them, Eskom, and then only to say Eskom will be pushed harder. What about the continuing financial disaster that is SAA?
On a positive note, government at least recognises that South Africa is in a dire economic position and needs to act responsibly. This article was first published on BusinessBrief on 7 July 2020