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2020 Supplementary Budget Sets Out Economic and Fiscal Response to COVID-19

June 24, 2020

National Treasury

INTRODUCTION

The 2020 Supplementary Budget has two objectives.

The finance minister, Tito Mboweni, highlighted this during the Supplementary Budget Speech in the national assembly.

Firstly, it tables an Adjustments Appropriation Bill and a Division of Revenue Amendment Bill in parliament. It also formalizes the Draft Disaster Management Tax Relief Bill and the Disaster Management Tax Relief Administration Bill to give effect to government’s response to the COVID-19 pandemic.

Secondly, it seeks to forge a new economy in a new global reality by setting out a roadmap to stabilize debt, improving spending patterns and creating a foundation for economic revival.

According to the finance minister, South Africa has many strengths.

“These include our young and ambitious people; Our institutions, a robust and vibrant democracy, independent judiciary and our commitment to social justice progress; and our economic strengths: a diverse industrial base, a flexible exchange rate, stable inflation, and deep domestic capital markets that allow us to borrow mainly in rand.”

However, debt is a weakness and the downturn brought about by the global pandemic is set to increase this.

Currently, out of every rand paid in tax, 21 cents goes to paying interest on past debts.

A reduction in debt will reduce interest rates and unleash investment and growth.

According to the 2020 Supplementary Budget Review, the 2020 Special Adjustments Budget sets out government’s initial economic and fiscal response to COVID-19.

“It fast-tracks normal processes to provide resources to frontline services, provincial and local government, and firms and households, with a focus on the most vulnerable South Africans. It also underlines our commitment to stabilise the public finances and enact reforms that will promote trade, investment and job creation.”

The Budget Review emphasizes that government is spending far more than it collects in revenue resulting in mushrooming debt.

“A failure to halt and reverse this pattern will harm the livelihoods of South Africans for many years to come. Left unchecked, the interest payments on that debt will become one of government’s largest expenditure items over the medium term. An ever-increasing share of tax revenue will not go to hospitals, schools or social grants – instead, it will be transferred to bondholders.”

The Supplementary Budget is described as a bridge to the October 2020 Medium Term Budget Policy Statement that will set out Cabinet’s proposals to strengthen the public finances and accelerate economic growth in the context of a changed global economy.

ECONOMIC OUTLOOK

As regards the economic outlook, a global contraction of 5.2 per cent is expected for 2020.

In the local economy, unemployment increased by one percentage point, reaching 30.1 per cent in the first three months of this year.

Treasury predicts that the South African economy is now expected to contract by 7.2 per cent in 2020 and inflation will likely register 3 per cent in 2020.

FISCAL, MONETARY AND OTHER MEASURES

According to the finance minister, government’s “COVID‐19 economic support package directs R500 billion straight at the problem”.

It is described as one of the largest economic response packages in the developing world.

Other measures include that the South African Reserve Bank reduced interest rates and made it easier for banks to lend money, more than 2 million customers received around R30 billion in relief from their commercial banks, insurers and medical aid schemes provided premium holidays and landlords provided rental relief.

REVISED FISCAL FRAMEWORK FOR 2020/21

The finance minister indicated that projected total consolidated budget spending, including debt service costs, is set to exceed R2 trillion for the first time ever.

Gross tax revenue for the 2020/21 fiscal year is revised down from R1.43 trillion to R1.12 trillion resulting in a R300 billion shortfall on projected tax revenue.

The budget deficit for 2020/21 is predicted to be R761.7 billion, or 15.7 per cent of GDP as compared to the deficit of R370.5 billion, or 6.8 per cent of GDP projected in February.

Gross national debt is set to be close to R4 trillion, or 81.8 per cent of GDP by the end of the current fiscal year as compared to an estimate of R3.56 trillion or 65.6 per cent of GDP projected in February.

Government plans to borrow approximately US$7 billion from international finance institutions to support the pandemic response.

HEALTH AND FRONTLINE SERVICES

The Supplementary Budget proposes R21.5 billion for COVID‐19‐related health care spending. It also proposes a further allocation of R12.6 billion to services at the frontline of the response to the pandemic.

Provinces will add at least R5 billion for the education catch‐up plan, social welfare support for communities and provision of quarantine sites by public works departments and responses in other sectors.

SOCIAL ASSISTANCE

The finance minister highlighted that, so far, over 18 million South Africans have received a temporary COVID‐19 grant.

“The roll out of the short‐term Special Relief of Distress grant will temporarily support those without an income.”

An additional 1.5 million people have received these already.

An additional allocation of R25.5 billion to the social development department is proposed resulting in a total relief package of R41 billion.

All the measures will come to an end in October.

ECONOMIC SUPPORT

The Economic Support Package sets aside R100 billion for a multi‐year, comprehensive response to the jobs emergency.

The Unemployment Insurance Fund (UIF) has, as of mid-June, provided R23 billion in COVID‐19 relief to over 4.7 million workers affected by the pandemic.

ADJUSTMENTS TO THE DIVISION OF REVENUE

The division of revenue presented in the 2020 Budget is revised as follows:

• the national share for 2020/21 increases from R758 billion to R790 billion;
• the provincial share decreases from R649 billion to R645 billion; and
• the local government share increases from R133 billion to R140 billion.

According to the finance minister, local government is at the heart of government’s response to the pandemic.

Consequently, an additional R11 billion is allocated to local government through the equitable share.

A further R9 billion will be reprioritised within allocated conditional grants to fund additional water and sanitation provision and the sanitisation of public transport.

COVID‐19 LOAN GUARANTEE SCHEME

In its first month, the scheme lent over R10 billion.

The finance minister confirmed that many more applications are being processed and lending is expected to rise significantly.

Amendments to the repayment holiday and turnover limit were being finalised and terms and conditions to support lending relaxed.

The South African Reserve Bank and the commercial banks are finalising the revised legal arrangements and announcements will be made shortly.

The plan is also to expand the scheme to non‐bank lenders.

BUILDING A BRIDGE TO THE FUTURE

Government plans to narrow the deficit and stabilise debt at 87.4 percent of GDP in 2023/24.

Cabinet has also adopted a target of a primary surplus by 2023/24.

According to the finance minister, the Medium Term Expenditure Framework process will be “guided by the principles of zero‐based budgeting which will be applied as a series of overlapping evaluation exercises targeted at large programmes”.

The current Public Expenditure Reviews is described as a step towards zero‐based budgeting.

“This means that we will try to reduce all expenditure that we thought we can no longer afford. After all, we are not as rich as we were ten years ago.”

The upcoming MTEF will pilot this approach.

Government also needs to find spending adjustments of about R230 billion over the next two years.

Tax measures of R40 billion over the next 4 years will also be required.

The tax proposals will be announced in the 2021 Budget.

R3 billion will also be allocated to recapitalise the Land Bank.

FAIR AND FISCALLY SUSTAINABLE PUBLIC SECTOR COMPENSATION

The finance minister announced that the public service and administration minister, Senzo Mchunu, is negotiating with our partners in the labour movement to find a balanced solution that sets compensation at an appropriate, affordable and fair level.

PUTTING INFRASTRUCTURE AT THE CENTRE OF GROWTH

“Infrastructure will be the fly wheel by which we grow the economy. Just as we have toiled together to manage the pandemic, let us harness this same unity of purpose and build the infrastructure our nation needs.”

The finance minister drew attention to the successful Sustainable Infrastructure Development Symposium held yesterday that drew in sector specialists, technical and financial structuring experts and policy departments that considered 177 infrastructure projects across public and private sectors.

He stressed that government needs to reduce long‐term interest rates to allow business and households to drive faster economic growth.