With COVID-19 hitting the South African shores in March 2020, the South African government enforced a strict lockdown bringing an already battling economy to its knees. To try and compensate to some extent for this, on 21 April 2020, the President of South Africa, Cyril Ramaphosa, announced a R500 billion (bn) fiscal support package, writes Dr Sharon Smulders, SAICA Project Director: Tax Advocacy. The areas that this support would be channelled towards were contained in the 2020 Special Adjustment Budget Guidelines document released on 18 May 2020, the areas are set out below:
The funding of this support package of R500bn was to be obtained from the following sources:
- A reprioritization of the 2020/21 budgeted amounts (R145bn);
- Loans from international organisations; and
- The Unemployment Insurance Fund.
The reprioritization of the R145bn from the original budgeted amounts that were announced in February 2020 by the Minister of Finance, Tito Mboweni, was not only necessary to enable the spending on the COVID-19 relief measures as set out above, but also to cater for the substantial under collection of revenue that SARS would be faced with due to the reduction in employment and taxable profits. With reduced working hours and many employees being retrenched, the reliance on PAYE (usually amounting to 40% of the total tax revenue) is no longer a possibility. Employees having less money in their pockets and economic activity that almost grinded to a halt due to lockdown, meant a knock-on effect would be felt in respect of the next biggest revenue generator for SARS – VAT. With less consumption taking place, these revenues (usually about 25% of total tax revenue collection) would also not materialize. Less import taxes, customs and excise duties and fuel levies will also be collected due to a slowdown in imports, sales of cigarettes, liquor and fuel. Corporate taxes will also decline due to many businesses struggling just to stay open. The SARS Commissioner, Edward Kieswetter, estimated at the beginning of May 2020 that there would be a tax revenue short fall of R285bn. Fast forward to 24 June 2020 and this forecast is revised to R304.1bn. This amount might also be understated as the amounts SARS will actually collect in cash, will most likely be very different as many companies, large and small, are grappling with cash flow constraints and would just not be able to pay their taxes despite the willingness to do so. The choice of paying salaries versus taxes has many businesses owners staying awake at night as their companies just don’t have enough cash for both and SARS’ debt book may like many companies, start ballooning towards the end of the fiscal year.
Reduced tax revenue and the additional burden of having to find the funds for the additional COVID-19 expenditure that was not catered for in the February Budget, forced the Minister of Finance to table a Supplementary Budget on 24 June 2020. The Supplementary Budget provides for the changes in the way in which the money will be allocated to cater for the additional COVID-19 relief measures. In order to do this, departments had to identify programs or activities that could be temporarily suspended without negatively impacting the longevity of the programmes.
The reallocation of funds from the February budget (R145bn) was, however, not sufficient to cover the additional costs (R500bn) that the government had to incur due to COVID-19. Neither was the utilization of funds from the UIF. Hence the government was forced to obtain loans to cover this shortfall – the government intends to borrow 7bn US Dollars (USD) from multilateral finance institutions of which a loan from the New Development Bank (USD 1bn, roughly R18bn) has recently been obtained. The terms of this loan is not yet known, but it more than likely means that the country will incur more interest expenditure, presumably in dollar terms. This could explain Minister Mboweni’s warning before the release of the Supplementary Budget that the debt to GDP ratio could reach 100% in 2024/25, although this estimate was revised in the Supplementary budget and debt will now only peak at 87.4% in 2023/24 and will gradually decline thereafter, or so the Minister predicts. The IMF would also be approached to borrow USD 4.2bn through its rapid finance instrument, which is a low-interest emergency facility.
The Minister correctly warns that borrowings are not revenue and it is agreed that it should not spent like it is. So where to from here? South Africa cannot afford to continue funding its day to day obligations out of debt. Debt must be reduced and to do this, government must, at least as a start, break even on its budget; meaning that its expenditure must match its income. This can be done by either increasing income or reducing expenditure. The scope for increasing tax revenues has all but disappeared, hence tax increases of only R40bn are proposed over the next four years – not near enough to cover the current deficit of R709.7bn. So there are two possible options:
- Print more money – that is, the South African Reserve Bank (SARB) must enter into a bond buying program; or
- Reduce expenditure.
The first option is currently never really feasible as highlighted by the Governor of SARB as it could bankrupt the Bank cause a rapid increase in inflation i.e. the rate of increase in the cost of goods. The second option is thus all that remains.
Conclusion
“We need to live within our means” as stated by Minister Mboweni is now non-negotiable. The mention by Minister Mboweni that future expenditure will be guided by the principles of “zero-based budgeting” where all expenses must be justified by rigorous analysis before being approved is music to one’s ears. However, that expenditure must also be aligned to a proper economic plan (not just a wish list of political ideals) and with the relevant accountability by political leadership and all employees. The government has to ensure that only expenditure that provides value for money and for which there is no cheaper alternative, should be permitted.
When reducing spending, a proper economic plan will direct where we are spending too much and where we are spending too little. It however needs to be informed by a proper consensus of a future state such as what is the role of the state in creating economic value, what are our strengths and targeted economic areas for developments, what is the consensus on living wages, labour relations and productivity and what are the societal goals such as housing and healthcare that will ensure increased productivity and efficient delivery of the plan. Currently there is such a platform to answers these fundamentals called NEDLAC and we should start asking questions whether they have really been busy for the last 26 years with the right discussions and actually reaching the required consensus to inform efficient spending by the state.
Such discussions and consensus will direct how to address the concerns on the public sector wage bill (which has grown to over 40% of tax revenue with no matching service delivery statistics) and state-owned enterprises (that need to be sold or liquidated if not viable) but also as to what should be our priorities for infrastructure spending.
Should government not reduce expenditure meaningfully by making a clear dent in the budget deficit, the alternative, is that government would be forced to apply to the IMF for a further loan (not many other options are available) – but this time in terms of the Structural Adjustment Program. This program would force the South African government to implement certain policies – such as stabilization policies which would include balance of payments deficits reduction through currency devaluation, budget deficit reduction through higher taxes and lower government spending, also known as austerity and restructuring of foreign debts which could have dire consequences for the citizens of the country. It has been found that in some instances these policies have resulted in governments spending less money on the essential services such as education and health than on servicing international debts. Clearly this is not a situation that South Africa would want to find itself in.
Author: Dr Sharon Smulders, SAICA Project Director: Tax Advocacy
