South Africa: Government presents FY 2020 supplementary budget and ambitious debt stabilization plan
On 24 June, the government presented a supplementary emergency budget for the current fiscal year (FY) 2020–2021, which runs until March 2021. In light of the Covid-19 crisis, the budget outlines increased health spending, support to state-owned enterprises and higher debt-servicing costs. At the same time, the authorities set out an ambitious fiscal consolidation path with the objective of achieving a rapid stabilization of the public debt stock. Although the revised spending plan highlights a firm commitment to fiscal discipline, it risks undermining the economic recovery and will face significant political hurdles.
The revised budget projects revenues of ZAR 1.1 trillion (22.6% of GDP, down from the estimated 25.8% in the February budget), yielding a consolidated budget deficit of ZAR 762 billion (15.7% of GDP, more than double the previously projected shortfall of 6.8% of GDP). The framework for the budget has taken into account the blow to revenues due to the global pandemic; higher government spending due to the stimulus directed at mitigating the fallout from the pandemic; as well as higher debt-servicing costs.
Amid the rapidly deteriorating economic backdrop, the government projects debt to soar from 63.5% of GDP in FY 2019–2020 to 81.8% of GDP by March 2021, before peaking and stabilizing at 87.4% of GDP in FY 2023–2024. The Treasury has targeted a primary surplus to be achieved by cutting expenditure by ZAR 250 billion over the next two years, hiking taxes, and implementing further spending adjustments and economic reforms. This will come in addition to the ZAR 160 billion public wage bill reductions already announced in February and more details about future reforms are scheduled to be announced in the Medium-Term Budget Policy Statement in October.
The plan to stabilize the debt stock and achieve a primary surplus by fiscal year 2023–2024 is ambitious and demonstrates the government’s commitment to fiscal discipline. However, it will require severe spending cuts, which could undermine the economic recovery. Moreover, social and political factors, such as high levels of inequality and stark divisions with the governing African National Congress, will present hurdles for large cuts to expenditure.
Commenting on the budget, Dylan Smith and Andrew Matheny, economists at Goldman Sachs, noted:
“We think it significant that Minister Mboweni made explicit reference to a looming sovereign debt crisis in an attempt to underscore the urgency of his proposed debt stabilisation target. In our view, the move to a more ambitious fiscal reform programme than that contained in the February budget is positive. Given the tight timelines and urgent Covid-19 response priorities faced by the Treasury team, a lack of detail on how to achieve this consolidation was to be expected. However, the debt stabilisation programme will likely face political opposition from elements of the government’s social coalition, and its credibility will rest heavily on the announcements deferred to October.”