Finance minister Tito Mboweni presenting the medium-term budget policy statement in parliament. Photo: GCIS
  • The medium-term budget policy statement shows that government plan big cuts to spending over the next few months.
  • This is because state debt is ballooning, at a time when tax income and the economy are shrinking.
  • Here's what you need to know about the medium-term budget policy statement.
  • For more articles, go to www.BusinessInsider.co.za.

The bad-news medium-term budget, presented by a grim finance minister Tito Mboweni on Wednesday, was filled to the brim with tough medicine. Mboweni announced a list of spending cuts and wage freezes to stop South Africa's government debt from spiralling out of control.

Here’s what you need to know about the state of South Africa's national finances.

SA’s debt situation is dire

South Africa is borrowing at a rate of R2.1 billion per day, Mboweni warned. Some 21c out over every rand that government earns now goes towards interest payments.

After expectations earlier this year that it would only grow to 66%, government’s debt is now expected to balloon to almost 82% of GDP by the end of 2020.

South Africa’s debt predicament is due to massive government overspending, particularly on civil servant wages (which now represent a third of total spending). At the same time, tax revenue has disappointed, and this year will be almost R313 billion less than what had been expected at the start of the year, mostly due to the pandemic.

Treasury is warning that the probability of a debt trap – in which keeping up with rising interest payments requires new loans – has increased, and says that South Africa’s three-year increase in debt to GDP is the largest among a group of developing countries.

Meanwhile the pandemic will cause the economy to shrink by 7.8% this year, with an expected average growth rate of only around 2% over the next couple of years.

“Based on this projection, the economy will only recover to 2019 levels in 2024,” Treasury says.

In response, government is planning spending cuts of more than R300 billion over the next three years.

A three-year wage freeze for civil servants is planned

After reneging on its 2018 wage agreement with civil servants, by not implementing a wage hike in the final year, government is now proposing another wage freeze for the next three years.

"Over the past five years, public sector employee compensation grew by 7.2% a year on average – well above inflation. Over the next five years, it will need to grow much, much slower," Mboweni said

There will be salary cuts for senior civil servants

“Our compatriots in the private sector have made sacrifices and even negotiated salary cuts to keep businesses afloat,” Mboweni said.

“Consideration should be given to the proposal for across-the-board compensation pay reductions to management-level positions, across national, provincial and municipal governments, state-owned entities all other senior public representatives.”

Big cuts are being made in defence, and home affairs spending

The new medium-term budget shows that the defence and state security budget will be cut by a massive R5 billion. Next year, it will receive only R47.2 billion – from R52 billion this year.

“The security cluster’s medium-term priorities are to fight crime and ensure territorial integrity. Because most departments in this function are labour intensive, spending reductions will mainly affect staff,” Treasury said.

Home affairs will also be affected. The medium-term budget confirms that the allocation to home affairs will fall from R10.5 billion currently to R9.1 billion next year.

Other departments that will see budget cuts include agriculture and rural development, with its allocation falling by almost R1 billion to R28.2 billion, as well as government’s “executive and legislative organs” – mostly Parliament. The legislature's allocation fell from R15.2 billion to R14.6 billion.

Zero-based budgeting is coming

Zero-based budgeting will be piloted at the department of public enterprises and Treasury next year, Mboweni said.

“It will be fully integrated into the budget system by the 2023 Budget. In practice, it will mean programme-by-programme and project-by-project analysis. We must discard those things that we no longer need to do and scale up those that are essential for progress.”

See also | Mboweni wants SA to move to a zero-based budget - here's what that will mean

No surprise tax hikes have been floated 

The medium-term budget plans for tax hikes of around R40 billion for the coming four years. The first round of tax increases will likely be announced in February 2021, says Dr Christie Viljoen, PwC Economist.

But Treasury made it clear that there was no appetite for considerable tax hikes.

Government spending remains too high for the tax base, admits Treasury.

“Recent tax increases have generated less revenue than expected, and evidence suggests that tax increases can have large negative effects on GDP growth.”

It wants government to focus on reducing public spending instead.

Treasury wants government to take a hard look NSFAS, and buses

In the medium-term budget statement, Treasury issues a strong call to rein in spending, which has exceeded government income for more than a decade.

“The persistent gap between spending and government revenue requires difficult decisions about the structure, effectiveness and affordability of certain programmes.”

It says high-level policy discussions are needed on, among others:

• The approaches to providing financial support to tertiary students. Since 2017, the National Student Financial Aid Scheme (NSFAS) has been providing bursaries or “fully subsidised" free higher education and training to poor and working class students in South Africa.

• The subsidy mix for urban transport systems. This is most likely a reference to commuter buses which are subsidised by government. Elsewhere in the budget statement, Treasury says at it won't pay a public transport network grant to at least two "poorly performing" cities, which still have not launched their integrated public transport networks. "The remaining cities will be required to reduce costs and demonstrate their effectiveness to remain funded."

• The structure of the human settlements delivery programme.

• The number and size of departments, ministries, and public entities in national and provincial governments.

There is little mention of the ambitious NHI

The medium-term budget does not much reference for the planned National Health Insurance (NHI), although Treasury did commit to look at costing for the NHI next year.

Apart from saying that it could improve healthcare services from both public and private providers, Treasury said “progress has been slow” for NHI.

Changes are coming for retirement funds

Government wants more workers to start saving for retirement, to reduce the burden on the state. It also wants retirement funds to invest in infrastructure projects.

In his speech, Mboweni announced that there has been an agreement between labour and business that from March next year, provident funds will be annuitised. This means that provident fund members will also have to buy an annuity (which will pay them a monthly amount) when they retire. Currently provident fund members can withdraw their whole investment in cash on retirement – but this will be lowered to a third. In return, they will enjoy tax deductions on their contributions.

Business and labour also agreed to speed up “auto-enrollment” into retirement savings products for all employed workers. A fund will also be established to cater for workers currently excluded from pension coverage.

Government will present legislation next year to allow for limited pre-retirement withdrawals.

In addition, government wants to change Regulation 28 so that it will be easier for retirement funds to increase investment in infrastructure.

Regulation 28 is intended to prevent retirement savings from being too concentrated in certain asset classes, and so protect those savings against wild swings in any one class.

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