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What will Finance Minister Tito Mboweni's 2020 Medium Term budget offer?

Published

2020

Thu

22

Oct

South Africa's economic recovery plan

The plan is aimed at fast-tracking the recovery of the economy from the devastation caused by the COVID-19 pandemic. It outlines government's plan to revive the economy with short and long-term interventions. If the plan is executed as presented, it is expected to support an average GDP growth of 3% over the next ten years. There are a number of key initiatives that the President has outlined. These include focused infrastructure rollout to support growth, energy supply, job creation, improving South Africa's export competitiveness, a drive to support local businesses which will support manufacturing, and fighting corruption. The plan, however, has thus far lacked detail on policies that would support this. This is something that the Finance Minister will hopefully address.

South Africa's economy going forward to 2021

The International Monetary Fund (IMF) and The World Bank annual meetings concluded with the IMF raising its global growth projections slightly upwards, still forecasting a contraction for 2020, but slightly better. This is due to a better outlook mostly in advanced economies where consumer incomes have been boosted by the unprecedented monetary and fiscal stimulus packages injected into these economies. Growth is expected to turn positive in 2021, including that of South Africa. This is premised on the assumption that the coronavirus will be under control without further surges in new infections. Should a vaccine be found, and social distancing and lockdowns ease off, global growth would improve even further in 2021. It's important to note that the bounce in growth will also be partly due to base effects; as the actual level of output in 2021 will not be materially higher than that of 2019. The poor growth outlook also means less tax revenue, which presents its own problems, particularly for South Africa.

Tax

Though this is old news, the fact that the country's GDP contracted sharply during Q2 is of material consequence to the budget statement. We already know that tax revenue will fall far short of projections made in February due to the economic consequences of the lockdown. In addition, government had to repurpose spending to meet the social and economic fallout from the pandemic in order to cushion the most vulnerable South Africans and businesses at risk. This has increased government's debt and interest obligations.

The Minister is expected to shed light on where we find ourselves in terms of the extent of the deterioration of tax revenue and how much the unprecedented spending has impacted the debt levels. In addition, it will be interesting to see if the Minister will expand further on some stated intentions on the back of the $4,3bn loan from the IMF to help combat the impact of the pandemic. These include: the consideration of a nominal (and debt) ceiling; phasing out COVID-19 relief measures, which have already been extended by three months; zero-based budgeting, which if adopted will increase fiscal discipline; imposing performance metrics on SOEs and not just pump in funding.

On the positive side, SARS is strengthening its collection capacity so it will help turn revenue around as the economy picks up from the easing of lockdown. Interest rates are at an all-time low and inflation remains subdued.

How consumers might be affected

Vulnerable households will continue to get support, which is critical. From the recovery plan there is a promise of employment opportunities to be created in the public sector. This will again add to the public sector wage bill, so it will be interesting to hear how the Minister addresses this.

This article does not constitute tax, legal, financial, regulatory, accounting, technical or other advice.  The material has been created for information purpose only and does not contain any personal recommendations. While every care has been taken in preparing this material, no member of Liberty gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy, or completeness, of the information presented. Please consult your financial adviser should you require advice of a financial nature and/or intermediary services.

Liberty Group Limited is a licensed Insurer and an Authorised Financial Services Provider (no 2409).

 
Source: By Tendani Mantshimuli: Consumer Economist at Liberty
 
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