BusinessTech 21 June 2020
Finance minister Tito Mboweni will deliver a special emergency budget this week, where he will table a new financial framework to respond to the coronavirus pandemic which has wreaked havoc on the local economy.
The budget will be presented on Wednesday, 24 June, and comes against a backdrop of an increasingly dire economic situation in South Africa.
Before the nationwide lockdown to curb the spread of the coronavirus, the country was already facing creeping GDP growth, record levels of unemployment, ratings downgrades, an increasing debt-to-GDP ratio, along with many other red flags on key economic indicators.
All of these factors have been exacerbated by the lockdown, which effectively shut down the entire economy for close to a month, and has been slow to open up again in the weeks that followed.
As a result, economists and analysts forecast declining growth of anywhere between 6% and 12% in 2020, and the loss of millions of jobs.
National Treasury has responded to the coronavirus crisis by presenting a R500 billion stimulus plan – including a R200 billion loan scheme for businesses, which will make up a large portion of the budget being delivered this week.
Specifically, Mboweni is expected to present how this stimulus will be structured as the ‘second phase’ response to the coronavirus pandemic, and where the R130 billion in reprioritised funding will come from.
According to analysts from Intellidex, Deloitte, and Tax Consulting, South Africans should temper their expectations for Wednesday’s budget, as there are no easy answers for National Treasury.
Talk of ‘zero-based’ budgeting – budgeting that begins at a base of zero, thereby not taking into account any leftover spending from prior periods – may be overblown.
And while taxes may seem like an easy option, nothing concrete is likely to come out from this budget, as Mboweni’s focus may shift to stabilising, rather than disrupting with new revenue streams.
BusinessTech outlines some of these expectations, and others, below.
When looking to raise revenue, taxes are commonly the first place people look for easy wins. However, as various analysts have noted – South Africa has effectively run out of avenues from which to tap the country’s tax base.
“The SA tax base is vastly shrinking and revenue is particularly lost in the areas where most of the tax collections come from,” said Tax Consulting.
“Tax from individuals, companies and Value Added Tax (VAT) are the three largest contributors to total tax revenue.
“Even before the Covid-19 pandemic hit SA unemployment was rife, businesses were failing and people were not consuming all which left a large dent in government’s purse.
“The current health crisis has exacerbated the situation beyond most South Africans’ imagination,” the group said.
Deloitte’s pre-budget analysis sees the situation similarly, pointing out that any new taxes or tax hikes at this point in time would be incredibly unpalatable, especially as most individuals and businesses are punch-drunk after months of stressed income and the prospects of financial collapse.
The few options that are open – a wealth tax, or increased taxes on things like alcohol and tobacco – are also not ideal, given the wider stresses on the populace.
“In our view, tax increases are unlikely,” Deloitte said.
Intellidex analyst Peter Attard Montalto said that no intra-year tax changes will (or can legally) occur at this point – but the way is open for government to look at “anonymous taxes” in its budget write-up.
This is where National Treasury says there have to be additional revenue measures in a given year without saying where they come from, but they get pencilled in as part of the budget.
These might be about R20 billion or so per year, he said.
“We have been very wary of these moves in recent years as they can lack credibility and can seem like a free lunch, initially,” Attard Montalto said.
“An actual discussion on specific tax increases will only occur into February.”
President Cyril Ramaphosa on Thursday (18 June) confirmed that South Africa’s economic response to the coronavirus pandemic will include a move to a zero-based budget process, in line with recent comments made by finance minister Tito Mboweni.
With this approach, budgeting essentially starts from a zero base and every function within an organisation is analysed for its needs and costs.
This is unlikely to happen, according to Attard Montalto.
“We should remember that (government) is pushing for a massive additional R1 trillion stimulus plan. Mboweni has been laying the groundwork in parliament in the last few days on how dire the situation is – to limit the post-fact backlash.
“Similarly, he is using ‘zero-based budgeting’ more for trying to shift the mindset than any realistic expectation of it happening,” he said.
This sentiment is echoed by Nazmeera Moola, economist at Ninety One, who said that the concept sounds better in theory than in practice.
Moola said that the finance minister will likely try to achieve a comprehensive assessment of what expenditure is taking place and whether the country needs to re-prioritise, or redirect expenditure, given the pressure that Covid-19 is putting on revenues.
“That’s a fantastic idea,” Moolsa said, but she noted that if what the minister is talking about is for every department to justify their expenditure from zero-up, “that’s a massive exercise that quite frankly we don’t have the time or man power to execute”.
With the recent business rescue plan for South African Airways showing billions of rands needed from the government to restructure the company, many will be on the lookout for potential funding mechanisms in the budget for this, and other state companies.
“We expect relatively little about additional SOE funding in this emergency budget, but we do expect NT to recognise the huge risk that is building. This will come in the text but also, we think, in the larger contingency reserve built in for the coming years,” Attard Montalto said.
The R5 billion per year reserve currently pencilled in may well rise further to account for the myriad of expected funding – but the analyst only expects two potential additional SOE funding moves – a small amount for SAA, and the Land Bank.
These funding mechanisms are already largely budgeted in, and further funding is more likely to be featured in the Mid-Term Budget Policy Statement later in the year, as it currently falls outside of the coronavirus response being dealt with this week.
The big question on the books is Eskom – but barring more cuts from higher levels of lockdown, current cost cutting measures at the group should keep it on a positive cash balance, Attard Montalto said.
Phase 3 coronavirus response
President Ramaphosa has also mentioned a move to the “third phase” of the country’s economic response to the coronavirus pandemic. This, he said, will “build an inclusive economy, that builds jobs, brings young people in and pushes the agenda of the fourth industrial revolution”.
“We need to bring in the private sector to invest in the economy while also strengthening the public sector. We will go through a slump as Covid-19 will still have its effect, but we will move on with the rebuilding process,” he said.
However, Attard Montalto said that this will be largely overlooked during the budget speech.
The only solid feature of this phase is the R1 trillion push for infrastructure, and even this will most likely be met with skepticism around timelines and execution, he said.
“Much of the rest is only at the start of complex negotiations and contestation among social partners that will stretch on for months. Business also is only shortly about to present its ideas, which will need to be agreed upon and compacted,” the analyst said.
“We do not expect any major new news announcements on ‘phase 3’ from the budget next week and indeed in this sense the media and markets may be somewhat disappointed.”