2020 MEDIUM TERM BUDGET POLICY STATEMENT
The 2020 Medium Term Budget Policy Statement (MTBPS) charts a course that will enable South Africa to begin the difficult task of economic recovery.
The finance minister, Tito Mboweni, highlighted this during the tabling of the 2020 MTBPS in parliament.
According to national treasury, government’s central policy goals over the next three years are to position the economy for faster, broad-based economic growth and to return the public finances to a sustainable position.
Recovery from the global recession triggered by the coronavirus pandemic is expected to be highly uneven and interrupted by new waves of infection.
The finance minister pointed out that the June 2020 Special Adjustments Budget was drawn up in an extremely uncertain environment.
At the time, government proposed a three-year fiscal consolidation.
However, since June, more data has become available.
The finance minister emphasized that the economy is now expected to contract by 7.8% this year, and the 2021 outlook is more uncertain.
He stressed that government cannot “allow our recent fiscal weakness and the pandemic to turn into a sovereign debt crisis”.
Therefore, government sets out active measures to avoid this.
A five-year fiscal consolidation pathway is tabled that promotes economic growth while bringing debt under control.
“The fiscal measures realign the composition of our spending from consumption towards investment and support efforts to lower the cost of capital.”
The plan is to stabilise the ratio of debt-to-GDP at around 95% within the next five years.
The minister also pointed out that the stock of gross debt will rise from approximately R4 trillion this year to R5.5 trillion in 2023/24.
The medium-term fiscal strategy aims to narrow the main budget primary deficit from an expected R266 billion in 2021/22 to R84 billion in 2023/24 with a surplus achieved by 2025/26.
National treasury proposes consolidated spending of R6.2 trillion over the 2021 Medium Term Expenditure Framework:
• R1.2 trillion goes to learning and culture
• R978 billion to social development and
• R724 billion to health.
As regards economic growth, national treasury forecasts that the local economy will grow by 3.3% in 2021, 1.7% in 2022 and 1.5% in 2023.
The finance minister declared that meaningful implementation of the Economic Reconstruction and Recovery Plan can result in growth of 3% or more.
“This will secure fiscal sustainability and build this economy better than before”, he said.
In terms of the global economy, a global recession is underway.
The International Monetary Fund expects global output to contract by 4.4% in 2020, before rebounding to 5.2% in 2021.
Emerging market countries are set to grow by 6% next year with Sub-Saharan Africa expected to rebound to growth of 3.1% in 2021.
As regards the local economy, treasury anticipates a strong recovery in the next quarter supported by the Economic Reconstruction and Recovery Plan.
South Africa experienced its largest recorded decline in economic output in the second quarter of 2020 due to the strict COVID-19 lockdown.
“Real GDP fell by 17.1 per cent relative to the previous quarter (or 51 per cent on a seasonally adjusted and annualised basis), with all major sectors except agriculture declining.”
Aggregate household consumption is expected to remain below pre-pandemic levels for some time.
Consumption will be severely constrained by record job losses, steep declines in incomes and low confidence.
Despite lower interest rates and inflation, demand for credit remains muted indicating that households expect prolonged economic weakness.
Inflation is forecast to fluctuate around the 4.5% midpoint over the medium term in line with moderating inflation expectations.
Real GDP growth is expected to average 2.1% over the medium term.
According to treasury, the impact of the COVID-19 economic contraction on South Africa’s public finances will be felt for years to come.
Tax revenue in the current year is projected to be R8.7 billion lower than the June estimate.
Gross debt is projected to reach 81.8% of GDP in the current year, up from 65.6% projected in February 2020.
Main budget non-interest spending has increased by R36 billion in the current year compared with 2020 Budget estimates due to net additions made for the COVID-19 fiscal relief package as outlined in the June special adjustments budget.
The main budget deficit is expected to widen significantly to 14.6% of GDP, from 6.8% of GDP as projected in the 2020 Budget.
Government proposes downward adjustments to main budget spending plans over the next three years. Relative to the 2020 Budget, total main budget non-interest expenditure is projected to decrease by R62.9 billion in 2021/22, R92.9 billion in 2022/23 and R150.9 billion in 2023/24.
As a share of GDP, non-interest spending will moderate from a peak of 32.4% in 2020/21 to 26.4% by 2023/24. This includes a contingency reserve of R5 billion per year over the medium term.
Compared with the 2020 Budget, the expenditure ceiling is lower by R58.9 billion in 2021/22 and R89 billion in 2022/23.
Gross tax revenue is expected to be 17.9% lower than collections in 2019/20, or R312.8 billion below the 2020 Budget forecast. The tax-to-GDP ratio is expected to decline substantially, dropping from 26.3% to 22.9%.
Tax revenue is expected to increase to R1.5 trillion, or 25.2% of GDP, by the end of the MTEF period.
In the short-term, tax increases of R5 billion are projected in 2021/22.
Gross loan debt is expected to increase from R3.97 trillion, or 81.8% of GDP, in 2020/21 to R5.54 trillion, or 92.9% of GDP, in 2023/24.
Compared with the 2020 Budget estimate, debt-service costs will increase by R3.8 billion to R233 billion in 2020/21. These costs will reach R353.1 billion, or 5.9 per cent of GDP, by 2023/24.
Treasury points out that consolidated government spending is expected to total R6.21 trillion over the medium term, increasing from R2.04 trillion in 2020/21 to R2.14 trillion in 2023/24, at an average annual growth rate of 1.6%.
As compared to the 2020 Budget, total main budget non-interest spending is increased by R36 billion in 2020/21 for the COVID-19 fiscal relief package.
Non-interest spending is reduced by R60 billion in 2021/22, R90 billion in 2022/23 and R150 billion in 2023/24 relative to the 2020 Budget estimates.
Over the next three years, departments will have to adjust spending priorities and programmes to take into account the revised baseline allocations.
In-year spending adjustments, as announced or provisionally allocated in the 2020 Budget, include:
• R23 billion allocated to Eskom.
• R6.5 billion allocated to South African Airways (SAA) for settling its guaranteed debt and interest.
• R84.7 million allocated to the Independent Communications Authority of South Africa for the licensing of high-demand spectrum.
• R36.5 billion reduced from compensation of employees, mainly from a freeze on salary increases.
• R10.5 billion allocated to SAA to implement its business rescue plan – mainly funded through reductions to the baselines of national departments and their public entities, and provincial and local government conditional grants.
Treasury also announced that, in order to continue mitigating food insecurity and poverty, an additional R6.8 billion is allocated to the social development department to extend the special COVID-19 social relief of distress grant for three months until 31 January 2021.
The short-term Tourism Relief Fund will also be extended to mid-2021 to assist eligible small, medium and micro-enterprises with working capital.
Over the medium term, government also proposes to allocate 48.2% of available non-interest expenditure to national departments, 42.2% to provinces and 9.6% to local government.
Over this period, national government resources decline at an annual average of 3%, provincial resources increase by 0.9% and local government resources increase by 2.1%.