Posted on July 03, 2020
Professor Jan van Heerden of the Faculty of Economic and Management Sciences outlines the implications of Finance Minister Tito Mboweni’s Supplementary Budget speech.
On 24 June, Minister of Finance Tito Mboweni delivered his Supplementary Budget speech, and, beforehand, many South Africans were apprehensive about the outcome. He concluded by saying: “The rain came down, the streams rose, and the winds blew and beat against that house; yet it did not fall, because it had its foundation on the rock. Let us listen, let us practise and let us build!” I was disappointed that the speech was over – primarily due to what he did not say.
The disruptive nature of the COVID-19 pandemic and the resulting economic downturn has made it necessary to table a Supplementary Budget as diversions from the February budget had to be approved by Parliament. The National Treasury will table a second adjustment budget in October, together with the Medium-Term Budget Policy Statement.
While scant detail was given in the speech, whether accidentally or deliberately, I believe the minister did as well as he could. He fared better than any single prediction made by another economist. Minister Mboweni understands how big the mountain is that South Africa has to climb during the next decade, and I hope he will be at the summit when we get there.
He highlighted two of South Africa’s biggest problems: unemployment and debt. The unemployment rate rose to more than 30% in the first part of 2020, while the debt-to-GDP ratio is expected to be more than 80% by the end of this fiscal year. Minister Mboweni indicated that South Africa would have to significantly increase the amount of debt as a result of COVID-19 before it can start decreasing it again in the years to come.
He promised that government would narrow the deficit and stabilise debt at 87,4% of GDP between 2023 and 2024. Early in his speech, Minister Mboweni stated very clearly that the debt situation could not continue: South Africa was already paying 21% of all tax revenue to debtors to cover interest. According to the minister, this situation needed to be addressed sooner rather than later.
My most significant point of critique is regarding the future of South African Airways (SAA). Incomprehensibly, government still wants to maintain the state-owned airline, despite advice from experts to the contrary. If government genuinely wished to decrease the country’s indebtedness over time, the starting point would be to stop throwing money at a failed project.
The second point of critique is directed at the somewhat vague reference to the future of Eskom and the electricity system in South Africa, and its relationship to the mammoth debt levels of the country. The minister described the system as archaic, having been implemented by King George in 1923. Minister Mboweni recommended that South Africa should move away from it, but did not say what would be done or how it would be financed.
I appreciated the reference to a programme of infrastructure building, which government is planning. Minister Mboweni stated that building a bridge to a post‐lockdown future would require us to build high‐quality physical bridges, roads, railways, ports and other infrastructure. In my opinion, this is the right focus and the only way to reduce unemployment. The construction industry employs large numbers of workers and is the second largest industry in which small, micro and medium-sized enterprises operate. If government tackles the plan effectively, in collaboration with the private sector, it could indeed be a bridge to South Africa’s post-lockdown future.
Minister Mboweni cautiously started implementing the principle of zero-based budgeting by making relatively small changes to some of the expenditure numbers presented in February: the equitable shares of some provinces would be decreased and some increased, while local governments would generally receive marginal increases. The changes were small enough not to solicit serious complaints, while the principle has now been established that the fiscus might change any budget they deem necessary. The age-old tradition of budgeting based on what a government entity had received in the previous budget round has been changed forever.
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