Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1698926780143.pdf (South Africa)
South Africa’s 2020 Supplementary budget: Presentation to a joint sitting of the Parliamentary Standing and Select Committees on Finance 1 July 2020 Presentation by the Fiscal Cliff Study Group: Jannie Rossouw Head: School of Economic and Business Sciences University of the Witwatersrand Fanie Joubert Senior Lecturer: Department of Economics University of South Africa Corresponding author: sjjoube@unisa.ac.za 1 Overview of Presentation • Comparison between February 2020 and Supplementary (June 2020) Budget – some highlights • No budget austerity in past 10 fiscal years • Government debt • Nominal GDP • Civil service remuneration • Fiscal cliff update • Conclusions 2 The people versus government 3 Comparison: February 2020 versus Supplementary Budget February 2020 (expectations) Supplementary Budget (changes) GDP growth of 0.9 % (2020) GDP contraction of -7.2 % (2020) Inflation 4.5% (2020) Inflation 3.0% (2020) Revenue under-collection of R300 billion Additional social relief package of R41 billion No further remuneration increase for civil servants No further remuneration increase for civil servants 4 Comparison: February 2020 versus Supplementary Budget, continued February 2020 (expectations) Supplementary Budget (changes) Major adjustments to expenditure items Zero-based budgeting* Consolidated budget deficit of 6.8% of GDP forecasted for 2020/21 Government gross debt level budgeted rise to 65.6% of GDP 15.7 per cent of GDP in 2020/21…main budget deficit, is projected to be 14.6 per cent of GDP 81.8 per cent
 of GDP by the end 2020/21 Debt-service costs 2020/21: R229.3 billion 2021/22: R258.5 billion 2022/23: R290.1 billion Debt-service costs 2020/21: R236.4 billion (R7.1 billion extra) 2021/22: R263.1 billion (R4.6 billion extra) 2022/23: R301.1 billion (R11.0 billion extra) *Zero-based budgeting, in which departmental expenses must be justified, accompanied by rigorous analysis.
Programmes that have little impact on economic performance or service delivery will be phased out (2020 Supplementary Budget Review, Chapter 4:31) 5 No budget austerity in past 10 fiscal years 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% -14.0% -16.0% -6.0% Ave. 2 0 / 1 0 0 2 3 0 / 2 0 0 2 4 0 / 3 0 0 2 5 0 / 4 0 0 2 6 0 / 5 0 0 2 7 0 / 6 0 0 2 8 0 / 7 0 0 2 9 0 / 8 0 0 2 0 1 / 9 0 0 2 1 1 / 0 1 0 2 2 1 / 1 1 0 2 3 1 / 2 1 0 2 4 1 / 3 1 0 2 5 1 / 4 1 0 2 6 1 / 5 1 0 2 7 1 / 6 1 0 2 8 1 / 7 1 0 2 9 1 / 8 1 0 2 0 2 / 9 1 0 2 * 1 2 / 0 2 0 2 * 2 2 / 1 2 0 2 * 3 2 / 2 2 0 2 Main budget balance, February 2020 Budget (% of GDP) Main budget balance, Supplementary Budget (% of GDP) GDP (February 2020 Budget) GDP (Supplementary Budget) *Treasury forecasts (2020 February and Supplementary Budgets) Source: SARB, Treasury 6 Government debt Likely still underestimated 90 80 70 60 50 40 30 20 Total gross loan debt, February 2020 Budget (% GDP) Debt sustainability threshold (??)
Total gross loan debt, Supplementary Budget (% GDP) *Treasury forecasts (2020 Budget) Source: SARB, Treasury 7 Nominal GDP • Nominal GDP expected to decline by R170 billion (3.4%) • Medium term growth projections possibly over-optimistic Source: June 2020 Supplementary Budget Review, Chapter 3, 27) 8 Civil service remuneration 2019/20 (Revised) 2020/21 2021/22 2022/23 2019 MTBPS 2020 Budget Difference 630.7 629.2 -1.5 675.2 638.9 -36.3 717.6 667.8 -49.8 758.5 697.1 -61.4 Average annual nominal growth 6.3% 3.5% Source: 2020 Budget, Own calculations 9 Civil service remuneration • The February 2020 provided for no general increase for civil servants, but also not for any reduction in salaries or in employment numbers • A general remuneration increase equal to the rate of inflation + 2/1 percentage point(s) (depending on seniority) in 2020/21 will amount to additional spending of some R40 billion on remuneration until March 2021, with a concomitant higher expenditure base in later years • The 3-year budget for civil service remuneration tabled in February 2020 should be maintained 10 Fiscal cliff • The fiscal cliff is the point where civil service remuneration, social assistance payments and debt-service costs will absorb all government revenue • Compensation of employees + social assistance payments + debt- service costs:    55,0% of tax revenue in 2007/08 75,5% of tax revenue in terms of February 2020 budget > 100,0% of estimated tax revenue in terms of 2020 Supplementary budget* *Estimate, some recovery could
 follow after the 2020/21 expenditure spike, as explained below 11 Fiscal Cliff Barometer • • Fiscal cliff barometer developed by the FCSG The fiscal cliff barometer is calculated as follows: • Values can theoretically range from one to minus infinity • In practice only values between one and zero need to be taken into account • A high value (e.g.
0,9) will indicate a high probability of the fiscal cliff being reached, while a low value (e.g.
0,3) will indicate a low probability of the fiscal cliff being reached The formula is able to take into account rolling forecast periods, which makes is more dynamic • 12 forecastedyearstotalclifftoyears1 Fiscal Cliff Barometer (February 2020) Year 2007 2014 2016 2018 Budget 2018 MTBPS 2019 Budget 2019 MTBPS 2020 Budget Years to cliff n/a 13 27 37 25 25 24 21 Total years forecasted 53 46 44 42 42 41 41 40 Barometer 0.000 0.717 0.386 0.119 0.405 0.390 0.415 0.475 13 Fiscal Cliff Barometer (February 2020) e u n e v e r f o e g a t n e c r e P 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% Upwards movement = deterioration Social assistance, compensation and debt-service cost (2019 Budget) Social assistance, compensation and debt-service cost (2020 Budget) Social assistance, compensation and debt-service cost (2007 Budget) *Graph intentionally limited to 100% of revenue 14 Fiscal cliff update estimate iro 2020/21: 2020 Supplementary budget • Assumptions: • A revenue reduction of R300 billion; • Once-off social grant payment increase of R41 billion (not sustainable) • No further remuneration increase for civil servants • Additional borrowing requirement of some R412 billion amounts to an increase of 11,5% in government debt to R3 974 billion.
• A concomitant increase in debt-service costs of R7.1 billion 15 Fiscal Cliff Barometer (2020 Supplementary Budget) e u n e v e r f o e g a t n e c r e P 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% Upwards movement = deterioration Social assistance, compensation and debt-service cost (2020 Budget) Social assistance, compensation and debt-service cost (2007 Budget) Social assistance, compensation and debt-service cost (June 2020 Budget) *Graph intentionally limited to 100% of revenue 16 Fiscal cliff: Projections for 2021/22 and beyond Assumptions: • Revenue recovery in 2021/22 and 2022/23 as per Supplementary Budget Review.
Thereafter growth of 6,5% per annum (average of 2007/08 to 2022/23) • Remuneration cost for civil servants is contained figures as per February 2020 budget.
Thereafter average inflation plus 1 percentage point • Debt-service costs figures as per Supplementary Budget Review until 2022/23, thereafter growth of 12,4% per annum (average of 2007/08 to 2022/23) • Social assistance payments to increase by average inflation plus 1 percentage point 17 Fiscal Cliff Barometer (February 2021) e u n e v e r f o e g a t n e c r e P 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% Upwards movement = deterioration Social assistance, compensation and debt-service cost (2020 Budget) Social assistance, compensation and debt-service cost (2007 Budget) Social assistance, compensation and debt-service cost (2021 Budget estimate) *Graph intentionally limited to 100% of revenue 18 Conclusions • • FCSG predicted this fiscal crisis since 2014: – The fiscal cliff has now been reached – Although some recovery could follow after the 2020/21 expenditure spike; we have seen a structural shift closer to the cliff face For the last decade South Africa did not have austerity budgets (an austerity budget is, at the least, a balanced budget), therefore – No reserve capacity was created – The zero-based budget approach is highly appreciated and necessary • Protect institutions that still function well, but: – Refrain from helping non-essential failed State-owned enterprises (SOEs);
 e.g., Alexkor, Denel, SA Express, SA Airways (importance of Council on SOEs) – Limit the remuneration of executives at SOEs, as was proposed in the February 2020 budget 19 Conclusions • Only very rapid economic growth can turn this position around • South Africa should be the investment conduit into the subcontinent • The FCSG reserves some scepticism regarding medium term forecasts, recovery a “V”-shaped strong based these are on as • Lastly we urge members to take note of the Minister’s warning in relation to a looming “sovereign debt crisis” • Global lenders’ willingness to provide funds; should not be confused with South Africa’s ability to repay it 20 Questions/Discussion Selected references: • 2020 Supplementary Budget and various National Budget Reviews.
• Mbeki, M, Rossouw, J, Joubert, F and Breytenbach, A.

2018.

Fiscal Cliff Barometer.

New Agenda: South African Journal of Social and Economic Policy.

Volume 70.

Third Quarter 2018.

• Rossouw, J and Breytenbach, A.

2016 Fiscal constraints determine South Africa’s social agenda.

New Agenda: South African Journal of Social and Economic Policy.

Volume 62.

• Rossouw, J, Joubert, S. J. en Breytenbach, A.

2014.

Suid-Afrika se fiskale afgrond: ‘n Blik op die aanwending van owerheidshulpbronne.
Tydskrif vir Geesteswetenskappe, 54 (1): pp.

144-162.

• Rossouw, J., Joubert, S. J. en Breytenbach, A.

2016.

Suid-Afrika se fiskale keuses gemodelleer: Afgrond of plato?

Tydskrif vir Geesteswetenskappe, 56 (2-2): pp.

534-554.

21