(By Chris Blair and Bryden Morton from 21st Century)

On 28 October 2020, Finance Minister Mboweni addressed the nation and presented the medium-term budget speech (MTBS)…

This was an unenviable task because the Covid-19 pandemic and subsequent lockdown period have resulted in the expected contraction of 7,8% in the economy for 2020 to be the deepest in nine decades.

Minister Mboweni sought to balance current economic issues such as revenue shortfalls, job losses and the economic contraction with long term issues such as the debt-GDP ratio, reviving economic growth and restoring economic stability.

The speech quotes many economic concepts and numbers that have been deeply affected by the Covid period and so it is difficult for the man or woman in the street to be able to understand the true state of affairs.

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This article, By Chris Blair and Bryden Morton from 21st Century,  looks at a few key areas of the 2020 MTBS and explains what this means to the typical South African person.

1.     Budget Deficit

This concept is the same as if an individual consistently spends more money than their salary, then they will have a budget deficit over time and need to loan money to finance the shortfall. So to if government spends more than the revenue it receives then this shortfall will need to be financed via credit.

In the February 2020 annual budget speech, it was forecast that the debt-GDP ratio would reach 71.3% by 2023 due to the widening fiscal gap (the shortfall between revenue and expenditure). This figure is now expected to reach 81.8% at the end of the current financial year, up from the 65.6% forecast in the February 2020 budget speech.

This figure is forecast to stabilise at 95% in the next 5 years. This means that South Africa’s debt will nearly equal the value of the economy and the interest on this debt will have to be serviced through tax collections from the South African people and companies.

2.     Economic Growth/Recession

The economy is expected to contract by 7.8% this year and grow by 3.3%, 1.7% and 1.5% in 2021, 2022 and 2023, respectively.

This may sound like the ‘storm is over and the sun is set to shine’ in the coming years, however, the graph of our real GDP index paints a more sobering picture.

3.     Real GDP Index (base year 2019 = 100)

The graph uses 2019 as the base year and calculates how the forecast levels of economic activity in the coming years (2021 to 2023) will impact the recovery from the current recession South Africa is in this year.

The present forecast indicates that heading into 2024, South Africa will have a lower real GDP than it had in 2019. This suggests that the road to recovery will be a slow, bumpy road as we seek to revive the economy and that it will take more than 5 years for us to fully recover.

4.     Debt Repayments

In the MTBS it was stated that presently, South Africa’s debt repayments account for 21 cents out of every R1 of revenue collections. This is a sombre reality that more than 1/5 of revenue collected is not available for productive public spending.

This equates to the man/woman in the street having to pay 21 cents out of each Rand they earn straight to a bank for their loans and means that they cannot use this money on things like housing, clothes and food.

So too for South Africa, this ratio prevents the government from essential local spending on infrastructure and development for the country’s citizens.

5.     Pension/Provident Funds

Whenever people hear about the government making changes to the treatment of retirement benefits, it is usually met with a great deal of scrutiny. This is because of what a retirement benefit means to us, our financial security in our old age.

Two key changes were discussed:

  1. Provident funds must use 2/3 of their value to buy an annuity upon retirement (as of 1 March 2021). This means that the individual has to invest this money in a vehicle that pays them monthly during retirement and they cannot access the money in a lump sum. This does not apply to those older than 55 years old. Whether or not this is a positive move depends on who you ask. Those that crave flexibility and the independence to use their provident fund as they see fit may oppose such a move. In contrast, this is can be seen as a positive move for ensuring that retirement benefits are spread out over a longer period of time and thus reducing financial risk in a person’s old age.
  2. The MTBS stated that a review of Regulation 28 of the Pension Fund Act, had begun and the intent was to make it easier for investment into infrastructure projects. According to an article published on IOL (29 October 2020) “…currently Section 28 already allowed up to 25 percent of pension funds to be invested in infrastructure, but only 2.8 percent was invested.” This increase in the maximum percentage allowed to be invested in infrastructure projects does raise the question of who has this been raised for if the current up take is nearly 10 times below the current maximum allowed? Fortunately, investment into infrastructure has not been made mandatory and the Trustees of the funds are still free to decide where to invest. This is good news for individuals who may have feared that the autonomy of their pension funds may be interfered with.

This all paints a picture of a long, bumpy road which can take more than 5 years for the economy to return to 2019 levels (in real terms).

The budget deficit and associated debt repayments are forecast to increase over the next five years with the debt-GDP ratio peaking at 95%. Reducing the amount of public expenditure that goes to debt repayments is critical to the drive to regain economic stability.

The man and woman in the street will be adversely affected over this bumpy period and will need to tighten their belts before returning to prosperity.

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What does the medium-term budget mean for me and my pension?

The speech quotes many economic concepts and numbers that have been deeply affected by the Covid period and so it is difficult for the man or woman in the street to be able to understand the true state of affairs.