South Africa’s economy is now expected to contract by 7,2 per cent in 2020, its largest shrinkage in nearly 90 years, dragged down by the ravages of the Covid-19 global pandemic, Finance Minister Tito Mboweni said on Wednesday

Presenting a supplementary budget to Parliament via video conferencing because the pandemic has necessitated physical distancing, Mboweni placed infrastructure development at the centre of reviving economic growth.

He said commodity price increases and a weaker oil price had softened the blow, but that as a small open economy reliant on exports, South Africa had been hit hard by both the collapse in global demand and the restrictions to economic activity brought on by the health crisis.

1.  Millions of jobs at risk

A supplementary budget review also published by the National Treasury on Wednesday said millions of jobs were at risk and millions of households were experiencing increased hardship.

“The pandemic has had a profound impact on South Africa,” the National Treasury said.

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“All economic sectors have experienced a sharp downturn and small businesses in particular face extreme pressure. Tax revenue projections are down sharply.”

In its main budget review in February, the Treasury had predicted economic growth of 0,9 percent in 2020 for Africa’s most industrialised economy compared with a modest 0,2 percent last year.

On Wednesday, the department said the epidemiological path and economic consequences of the coronavirus pandemic were both highly uncertain and evolving rapidly, necessitating rapid adjustments in policy and forecasts.”

2.  Public health prioritised

It said over the past three months, South Africa’s government had prioritised public health to save lives and had taken the difficult step of severely restricting economic activity at a time when gross domestic product (GDP) growth was already weak.

“South Africa’s R500 billion fiscal relief package is designed to help households and businesses to weather the short-term effects of the crisis,” the treasury added.

The Treasury noted that it had for several years been warning that an absence of fiscal space would leave South Africa vulnerable to external shocks.

“That risk is now a reality,” it said. “At the time of the (February) 2020 budget, economic growth was already low and the fiscal position had deteriorated significantly. South Africa has begun heading into a debt spiral.”

3.  R21,5 billion proposed for healthcare spending

In his budget speech, finance minister Mboweni proposed R21,5 billion (US$1.2 billion) for Covid?19 related healthcare spending in a supplementary budget tabled in reaction to the pandemic and a further allocation of R12,6 billion to services at the frontline of South Africa’s response to the health crisis.

“Allocations have been informed by epidemiological modelling, a national health sector Covid?19 cost model and our experiences over the past 100 days,” he said.

“This money partly supports increased screening and testing, allowing us to open up more and more of the economy.”

He said the country had successfully increased its Covid?19 bed capacity to above 27 000, identified 400 quarantine sites with a capacity of around 36 000 beds across the country and deployed nearly 50 000 community healthcare workers to screen millions of South Africans.

Over 1,3 million people had been tested to date, he added.

4.  5 billion for education catch-up plan

The country’s nine provinces would add at least R5 billion for an education catch?up plan, social welfare support for communities and the provision of quarantine sites by public works departments and responses in other sectors.

The finance minister said the government remained deeply concerned about the path of the virus.

“But, in common with several other countries that adopted a stringent, early lockdown, we have ‘flattened the curve’ and saved lives,” he added.

5.  R3 billion to Land Bank but no new allocations for SOEs

The review also allocates an additional R3 billion to the troubled Land Bank, but provides for no new allocations to the country’s struggling state-owned enterprises, with Mboweni issuing a stern reminder that they are expected to put their houses into order.

Notably, he declined to answer any questions about South African Airways at a media briefing directly after his speech, which came on the eve of a crucial vote by creditors on whether to liquidate the national carrier or attempt to resuscitate it.

6.  R11 billion to local govt

Mboweni also moved a greater share of the national budget, some R11 billion, to local governments as he pointed out that these were at the coal face of the response to Covid-19, which has infected more than 100 000 South Africans and counting.

7.  Tax collection target missed by R300 billion

Revenue collection was forecast to reduce from R1,43 trillion to R1,12 trillion in 2020/21.

“That means that we expect to miss our tax target for this year by over R300 billion,” the minister said.

Mboweni stressed that South Africa’s worst economic risk was its rising debt levels, and said these were driven further north by the global health crisis. This was evidenced by the fact that total consolidated budget spending, including debt service costs, would for the first time ever exceed R2 trillion.

Debt was expected to stabilise at 87,4 percent of GDP in 2023/24.

8.  “Unconscionable burden on future generations”

Mboweni said it was placing an unconscionable burden on future generations and taking South Africa to the brink of a sovereign debt crisis if left unchecked.

“Debt is our weakness,” he said, adding that out of every tax rand, 21 cents would now go towards servicing debt.

“If we reduce debt, we will reduce interest rates for everyone and we will unleash investment and growth,” Mboweni said.

“So today, with an eye on the future, we set out a strategy to build a bridge to recovery. It is eating our children’s inheritance. We need to stop it now!”

9.  Govt spending cuts of R230 billion

The minister said government would find spending cuts of R230 billion over two years to reach debt stability within four years. The government had agreed to aim towards achieving a primary surplus within the same timeframe, he said.

Mboweni, who has at times during the past three months openly disagreed with Cabinet decisions affecting the economy, appeared emboldened as he said the National Treasury would use the medium-term budget policy statement in October to “pilot” zero-based budgeting.

“This means that we will try to reduce all expenditure that we thought we can no longer afford. After all, we are not as rich as we were 10 years ago…. a fiscal reckoning looms. The public finances are dangerously overstretched,” he cautioned.

“Through this gate, we reduce our reliance on borrowing. We feed the hungry. We look after the sick. We educate our people. We build for the future. We spend with wisdom, and we jail those who loot.”

10.  New tax measures announced in Feb

Mboweni said the new approach would require tax measures totalling R40 billion over the next four years. The new taxes would be announced next February.

The minister also dismissed suggestions that he was encountering political uphill from the left within the ANC as National Treasury tried to secure a US $4, 2 billion (R73,2 billion) loan with the International Monetary Fund to shore up its R500 billion response to the coronavirus.

Mboweni described the protracted talks with the Washington-based institution, seen as a threat to national sovereignty by some in the ruling party, as “tough” and “difficult” but said a proposal was now awaiting a decision by the IMF board.

The negotiations would never have reached that stage had he not had backing, he insisted, adding that a positive outcome was likely to pave the way for assistance from the World Bank as well.

“The storm is not over”

“The storm is not over. But, if we follow the health guidelines and make the right decisions to prepare for a new global reality then, soon enough, the days will grow calmer.”

Mboweni said building a bridge to a future beyond the current lockdown imposed to curb transmissions of Covid-19 would require building high?quality physical bridges, roads, railways, ports and other infrastructure.

“Infrastructure will be the fly wheel by which we grow the economy,” the finance minister said.

“Just as we have toiled together to manage the pandemic, let us harness this same unity of purpose and build the infrastructure our nation needs. Our efforts to reduce consumption expenditure will also change the composition of spending in the direction of investment.”

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Author: ANA Newswire