FINANCE Minister Tito Mboweni noted the harsh reality that nearly half of the government’s consolidated revenue will go towards paying public servants.     GCIS
FINANCE Minister Tito Mboweni noted the harsh reality that nearly half of the government’s consolidated revenue will go towards paying public servants. GCIS

Real growth needed to avoid debt crisis

By Amanda Visser Time of article published Jun 29, 2020

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The South African economy is experiencing the largest contraction in nearly 90 years. Expectations of any growth have been shattered by the Covid-19 pandemic and the measures needed to curb the spread of the coronavirus.

In his Special Adjustment Budget, Finance Minister Tito Mboweni this week painted a dark picture of the country’s future if the right decisions are not made in the medium term.

The biggest concerns are the threat of a debt crisis and the lack of tax revenue because of a 7.2% contraction in the economy.

The government expects to collect R300 billion less in tax revenue for the 2020 tax year, compared with about R60bn projected in February.

Liberty consumer economist Tendani Matshimuli expressed her concern about the anticipated debt-to-gross domestic product (GDP) ratio of almost 82% for this year, compared with the 65.6% that was projected in February. This means a staggering national debt of R4 trillion this year. And on top if this, the government intends to borrow about $7bn (R121.5bn) more from international institutions.

Even if the government is able to stabilise debt-to-GDP at about 87% in three years’ time, it does not mean much in the absence of real growth, Matshimuli says.

The intention of implementing zero-based budgeting (the goal is that your income minus your expenditure equals zero by the end of the month) is welcomed, but that requires “disciplined budgeting”.

“That is a huge undertaking for a beast like the South African government. Companies that are much smaller than our current government have tried zero-budgeting only with some measure of success,” says Matshimuli.

Joon Chong, partner at Webber Wentzel and committee member of the South African Institute of Tax Professionals, says the country’s ability to go through the “narrow gate and forge a new economy in a new global reality” depends on growing the economy.

“Economic growth will reduce our high unemployment rates. This will, in turn, strengthen the tax base and bring with it, an increase in tax revenue collected,” she says.

“Many South African families and businesses have cut spending drastically to ensure that they survive the devastating financial impact of the lockdown.

“South Africa’s national Budget must do the same.”

Chong says the zero-based budgeting principles adopted for the Medium-Term Expenditure Framework must be accompanied with a zero tolerance towards corruption and wasteful expenditure.

“Strong measures must be taken by clear leadership to reduce the financial demands of state-owned companies, and this must be done without political interference or motivation.”

Jean du Toit, tax expert and attorney at Tax Consulting SA, expected specific plans on how the government intends cutting its expenditure, particularly the bloated public sector and the wage bill.

However, Mboweni passed the ball to the minister responsible for the public service. Mboweni noted the harsh reality that nearly half of the consolidated revenue will go towards paying public servants.

Senzo Mchunu, minister of Public Service and Administration, must negotiate with the labour movements to find a “balanced solution” that will set compensation at an “appropriate, affordable and fair level”.

Du Toit says the country has seen massive unemployment figures, even when there was growth of 1%. “An expected economic contraction of 7% will see unemployment skyrocket. The knock-on effect will be devastating,” he warns.

The personal income tax base - which is the most important revenue income segment - will shrink. This means even more borrowings. It all accelerates the potential outcome of a debt crisis. The situation is precarious. “The ANC government has simply failed to address the unemployment problem, and it simply continues going in the wrong direction,” says Du Toit.

Matshimuli says it is time to kick-start the economy. “Many businesses have indicated that they may not survive, and many will not be able to continue carrying the number of employees that they currently have.”

She says sounding the alarm of a potential debt crisis is the right thing to do. “We need our minds aligned at what is required to do.”

According to Chong, the adjustments Budget adopts the right measures. “However, there are mountains ahead to climb towards faster growth, which will reduce unemployment rates in 2021.”

If South Africa is not able to reduce its expenditure bills faster than its increase in revenue, we will have a cycle of tax revenue mainly servicing the interest on public debt, with little left for investment and infrastructure spending.

“We will see massive deteriorations in infrastructure, health services and education, leading to higher levels of unemployment. The future would be bleak,” she warns.

PERSONAL FINANCE 

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