DESPERATE MISSIONS: THE 2020 BUDGET & SONA
Written by Richard Downing, Economist
The State of the Nation Address (SONA) and Budget 2020 were despairing efforts by the government to stop the door shutting on the South African economy. The call for radical economic transformation, the consequent radical deterioration of the South African economy, and looming last credit ratings downgrade by Moody’s could confirm the junk investment status of the South African economy. Action taken by Budget 2020, as well as the implementation thereof, might just avert a final self-inflicted downgrade to junk investment status. It is still uncertain to what extend the tone set in the 2020 SONA will come to the backing of the Minister of Finance and some of his assumptions. However, the Budget vote debates should finally determine the practicality of Budget 2020 and its effect on the economy.
The President delivered the 2020 SONA at a crucial juncture in the South African economy. South Africa is at a watershed moment where the subdued economy is in need of desperate structural adjustments and leadership. Leadership is expected to provide the required economic policy certainty, direction, and consistency that can convince investors, business, and citizens of a workable solution to the way forward. South Africa needs sustainable solutions to start dealing with the mammoth challenges of poverty, inequality, and unemployment.
Energy supply is becoming an even greater problem than its financial doldrums as Eskom’s output capacity is down to about 60%, placing the output potential of the economy up to a no-growth scenario with serious knock-on effects. Additionally, South Africa has problems that emanate from bad fiscal control and management, and severe macro-economic imbalances that compound the economic growth potential. This resulted and continues to cause an increasing high public sector debt to GDP ratio (see figure 3), owing to deteriorating revenues collected by SARS and unaffordable demand for social upliftment programmes and services. This scenario continued into the 2020/21 Budget that was delivered by the Finance Minister Tito Mboweni on 26 February 2020.
Revenue is estimated to increase by 3.9% (well lower than the 5.3% increase in estimated nominal GDP) while spending rises by 5%. This leaves a deficit before borrowing of 6.8% of GDP compared to a revised estimate of 6.5% for 2019/20. Therefore, no improvement on the current situation while the estimates of going forward is based on assumptions that may be difficult to achieve given the radical transformation of the economy as a long-term political goal. The social objectives of the ruling party and expectations outpace the ability of the economy, thus putting the economy on the road to disaster like Venezuela, Cuba, and Zimbabwe.
Although the Minister of Finance tried to suggest an about turn, the downgrade to below investment status by rating agencies will trigger a final meltdown or bring home the seriousness of the state of the economy and public finances. Unfortunately, the SONA did not make a clean break with radical transformation or provide strong leadership in the opposite direction. Although the private sector is seen as a partner (rather than a driving force), the role of the state still remains the means rather than the enhancer in achieving economic performance.
The figures below confirm the deteriorating public finance situation relative to a subdued economic performance. The source for the data was the South African Treasury at the tabling of Budget 2020/21 in Parliament.
Figure 1 – an unsustainable public sector financing dispensation. Tax proposals were benign in terms of the macro-economic context.
Figure 2 – ever increasing social burden with increasing debt servicing
Figure 3 – an unsustainable government debt outcome. A further consequence is that government is borrowing long to finance recurrent expenditure – so-called dissaving to the amount of about 6% of GDP. Deficit before borrowing is estimated at 6.8% of GDP in 2020/21 while ensued fixed investment in 2020/21 is only 0.9% and, 2% of GDP if financial assets are added.
Figure 4 – an unaffordable salary bill, unsustainable household grants, burden of debt servicing, and spiralling debt. Budget 2020/21 will be renowned for the cut of R160 billion over the next three fiscal years in the compensation of employees. Other baseline reductions of R101 billion over the next three fiscal years will also take place.
It is, therefore, imperative that declining and low levels of business confidence and a non-inspiring environment for fixed investment be rectified by bold leadership and support for the Minister of Finance to start rebuilding the economy. The National Democratic Revolution (NDR), Black Economic Empowerment (BEE), the Reconstruction and Development Programme (RDP), and Affirmative Action (AR) has faltered to deliver a positive economic environment in cases where efforts were not aimed at improving the individual’s ability to participate in a modern free-market economy. The current situation left South Africa stranded and in need of non-negotiable structural economic reform.
South Africa needs to get to a higher growth plane, normalise the political landscape, see that law and order are upheld, and message the local and international investor of a friendly environment (no property confiscation without compensation!). South Africa is compelled to urgently implementation fiscal and structural reforms that the Minister has addressed in Budget 2020/21.
The 2020/21 Budget was a last-ditch effort to start to remedy a desperate economic situation. It is trying to prevent the worst outcome that is evidently on the cards, and which is awaiting a downgrade to below investment status by the last reputable rating agency.
“Non-compliance …with Budget 2021 and SONA 2020…..will be too ghastly to contemplate!”
Conclusion
Budget 2020 is no stimulatory budget or even a holding operation, but is born out of desperation to stabilise and begin restructuring the public sector’s role in the economy to a sustainable position. The financial drain of State Owned Enterprises (SOEs) on the Fiscus has not even been properly addressed with contingent liabilities and guarantees still outstanding. More painful amputations and adjustments await the public sector. A long hall awaits government to put the economy back on track.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)