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  • The new national budget paints a grim picture of South Africa’s debt crisis, with a fifth of all tax income now going to creditors.
  • But Treasury now expects that debt will stabilise at below 90% of GDP – thanks to a surge in tax from mines and a stronger-than-expected recovery in VAT income.
  • Still, it needs an effective freeze in public sector wages for the next three years to make that happen.
  • For more articles, go to www.BusinessInsider.co.za

South Africa’s latest national budget continues to paint a grim picture about a government drowning in debt, pinning most of its hopes on taming the civil servant wage bill.

But thanks to a surge in tax payments from mines and a stronger-than-expected recovery in consumer spending, the situation is not quite as dire as was feared last year.

State of SA debt

In October, Treasury expected that the government debt burden would "stabilise" at more than 95% of GDP by 2025/2026. This has now been revised lower to 89% of GDP – from 80% currently.

Still, the pandemic has thoroughly wrecked South Africa’s already precarious finances.

In the past year, in part to cope with the Covid-19 economic fall-out, government’s gross borrowing increased from R433 billion to R670 billion. South Africa’s pre-pandemic budget deficit of below 6% blew out to an estimated 14% - a record - last year.

Its debt repayments are now starting to balloon. A fifth of all tax income is now paid to its creditors, with debt service costs reaching R233 billion over the past year.

"Funds that could be spent on economic and social priorities are being redirected to pay local and overseas bondholders," Treasury laments in its Budget statement. Its debt repayments are now increasing by 13% a year, and on track to reach almost R340 billion a year in two years’ time. South Africa will spend more on debt repayments than on its entire health budget.

The plan to deal with the debt

Better-than-expected tax revenue collection since October has increased government’s cash balances and will be used to cut borrowing, Treasury says.

This will be a drop in the ocean, however, and it has also announced budget cuts for social development, health and SA’s defence force, which will get 4% less over the next three years.

But its big budget priority is still the public sector wage bill, which represents more than a third of government spending and came to R637 billion over the past year.

It has budgeted an increase of only 2.1% this year in civil servant remuneration, and 1.2% per year over the following two years.

“These growth rates can be achieved through, for example, doing away with the annual cost-of living adjustment in the public service up until 2023/24,” says Treasury – meaning a wage freeze for the next three years.

In addition, state departments can reduce headcounts – by a combination of early retirement and natural attrition -  as well as freeze or abolish non-critical posts, Treasury says. Government is also exploring measures such as harmonising allowances and benefits, reconsidering pay progression rules and reviewing occupation-specific dispensations. Performance bonuses are already being phased out, and other allowances and benefits may also be amended or abolished.

Treasury notes that provinces are already spending less than they budgeted on wages, with only the Eastern Cape exceeding its compensation budget over the past year.

But municipalities are heading for trouble after they raised wages by 6.25% in July 2020, as part of the first year of a three-year wage agreement. This agreement was negotiated separately from the national agreement. National government refused to grant salary hikes last year, which were supposed to be part of its wage agreement. After unions took legal action, the courts found in government’s favour.

“Not all municipalities have budgeted for these increases. Unless municipalities rapidly improve efficiencies, this agreement will compromise the local government fiscal framework and service delivery.”

While pushing for a freeze on wages and job cuts, Treasury acknowledges the potential fall-out – particularly in education.

It expects that teachers will only receive pay increase of 0.8% over the next three years, and that early retirements will reduce the number of available teachers.

“This, coupled with a rising number of learners, implies larger class sizes, especially in no-fee schools, which is expected to negatively affect learning outcomes”

Tax changes

Treasury has decided to kill its plan for R40 billion in tax hikes over the next three years after higher-than-expected tax income since October.  Instead, individual taxpayers are getting income tax relief this year, and the hike in fuel levies is slightly tamer than expected. Sin taxes have been increased by large margins, though.

See also: Here are the big tax changes in this year’s Budget

Small hikes in social grants

Those dependent on social grants were not granted much relief in this year’s Budget, with grants increasing by less than inflation:

Old age grants increase from R1,860 to R1,890 – an increase of 1.6%.

For those over the age of 75, and war veterans, grants increase from R1,880 to R1,910 (+1.6%).

Disability grants increase from R1,860 to R1,890 (+1.6%).

Foster care grants increase from R1,040 to R1,050 (+1%).

Care dependence grants increase from R1,860 to R,1890 (+1.6%).

Child support grants from 445 to 460, increase of 3.4%.

In a post-Budget briefing, Finance Minister Tito Mboweni said there was "no need to be apologetic" about the small social grant increases. "There's no social contract where every year there must be X amount increase. This is what we could afford."

While Treasury expects the number of social grant beneficiaries to increase by 300,000 this year, the social grants budget has been cut by more than 2%.

Billions for vaccines

Government wants to vaccinate 67% of the population in a year, and Treasury has allocated an initial amount of R9 billion for the vaccines – which can increase to closer to R20 billion. However, some of the money will flow back as medical schemes will buy vaccines from the state. Treasury has allocated R100 million to the SA Medical Research Council for vaccine research.

Big increase in spending on roads, libraries and sport

In his budget speech, Mboweni remained committed to government's R791 billion infrastructure drive.

"This is not an austerity Budget. Our fastest-growing area of spending is our investment in the future-capital payments," he said. 

In the economic development budget allocation, spending on roads is growing the fastest – increasing at an average annual rate of more than 8% to reach R110 billion in the next three years.

And unlike the health and social development budgets, which saw budget cuts, spending on education and culture – which currently represents almost a quarter of government budget - will grow by 2.4%, this year. Arts and culture will see an 8% increase in spending, largely due to a R34 billion allocation to support community libraries, school sport and to drive transformation in sport.

Zero-based budgeting

This year, the department of public enterprises and Treasury will be the first departments to adopt zero-based budgeting. This means that instead of using last year’s budgets as a starting point, they will draw up new budget allocations from scratch

UIF in the red

UIF paid out R102 billion to recipients in the past year – an increase of 533% from the past year, and primarily due to the Temporary Employer/Employee Relief Scheme’s (TERS). While TERS will come to an end soon, Treasury expects that the UIF will pay out R93 billion in the next three years  - almost three times more than in the three years before the pandemic.

As a consequence, the fund will run an average deficit of R19.7 billion, Treasury says.

Eskom’s transmission decoupling, and R41m for new SOE body

No new allocations were made to SA's struggling state-owned enterprises.

Eskom received R56 billion last year, and, as previously budgeted, is getting R32 billion this year meant to "stabilise" the utility while government restructures it into three separate entities – generation, transmission and distribution. Treasury says that by December, the transmission division will be "legally separated" and that the separation of the generation and distribution divisions will be completed by December 2022.

The budget makes provision for an amount of R41 million to set up the Presidential State-owned Enterprise Council, a new advisory body that will help government “reposition” state-owned companies.

R100 billion for jobs

Last year, Treasury made R83.2 billion available for the public employment programmes, and another R11 billion will be allocated this year for the Presidential Youth Employment Initiative, taking the total funding for employment creation to nearly R100 billion.

By the end of January 2021, more than 430,000 jobs of "various duration" – including as temporary teaching assistants and in programmes to reduce landfill – have been created as part of a public employment initiative, and an additional 180,000 jobs are in the recruitment process.

More than R65 billion has also been allocated to help an estimated 89,000 artisans to register for training and to create more than 320,000 work-based learning opportunities.

Municipal underspending

Treasury highlighted the large underspending among municipalities, which spent only 80% of their combined budget of R481 billion. Most of the underspending was in capital expenditure projects – with municipalities only spending 60% of their budgets for capital projects.

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