Detailed analysis of the Supplementary Budget proposals on spending, debt and raising more revenue

Spending plans: a deepening of austerity despite the socio-economic crisis

The Supplementary Budget proves what many analysts have been saying for weeks: that the so-called R500 billion economic relief package announced in April is a mirage. As the country faces the worst social and economic crisis of the democratic era, only R36 billion of new money has been allocated in the fiscus to help the country to cope. At a mere 2% of non-interest expenditure (proposed in the February budget), this is not even close to a “stimulus”. In fact, in many cases, sectors, including education, have less money to spend than was allocated to them in February, despite the additional burden placed on them by the pandemic.

Womxn, children and GBV ignored

From start to finish, the Supplementary Budget Review is gender and child-blind. Despite the recent prominence of political rhetoric on ‘gender equality’, this budget is yet another missed opportunity to secure increased revenue and allocations to address the deep inequalities and exclusions of women across sectors which have persisted and deepened over the past decades. In his address on 17 June President Cyril Ramaphosa indicated that ‘giving women the necessary support to become financially independent is the greatest of priorities, especially now’. This budget does not demonstrate that womxn have been prioritised in any way and is another reminder of the National Treasury’s resistance to gendered budgeting. This budget also completely ignores the ways that children have been affected by the lock-down and then goes further to cut spending in areas that are critical to children’s well-being.

The BJC is seriously concerned that the Supplementary Budget Review makes no mention of allocating resources to address what the President has referred to as ‘another pandemic’ of violence by men against ‘women and children’. The radical rates of violence against womxn and against children, and failures in support, protection and justice in South Africa have long preceded the COVID-19 pandemic, but been exacerbated by lock-down conditions. Both womxn and children have been more exposed to conditions that contribute to violence, while having less access to the (usually poor) support, safety and justice services.

In May, the much anticipated National Strategic Plan on Gender Based Violence and Femicide (GBV-F NSP) was finalised, but without any budget information. Without a budget, the GBV-F NSP cannot achieve the deep changes needed. The failure of this supplementary budget to provide the information on allocations to the GBV-F NSP or the additional barriers to accessing support during the lock-down is unacceptable. With this budget we again see the pattern of failure to allocate towards initiatives to intervene in this second pandemic that increases the risk to the majority of our population of increased fear and brutality.

We instead see cuts to the National Prosecuting Authority budget within the Department of Justice and to detective services within SAPs which could negatively affect the prosecution and conviction of crimes against womxn and children, and the provision of support services within Thuthuzela Centres. Furthermore the lack of any additional funding for provinces, combined with the requirement that they re-prioritise R20 billion to the COVID response, carries a significant risk that violence prevention and victim support services for womxn and children within provincial DSD’s will be reduced. The lack of direction from National Treasury on the need to prioritise these services in the reprioritisation process is startlingly absent from the supplementary budget documents.

Health care - uncertainty of funding

Our two-tier health system is one of the most costly in the world in relation to GDP. It is also one of the most unfair systems in the world. The government supports private health care with medical tax credits costing the fiscus more than R25-billion per year. Now was the time to make a cut in this tax expense, starting to phase it out. The failure to do so now, when the COVID-19 crisis has made everyone aware of the deep crisis in public health, signals that the universal National Health Insurance is not supported by the Treasury and never will be implemented under its present leadership.

Government has repeatedly committed to providing all the resources necessary to enable the health sector in particular to respond effectively to the COVID-19 pandemic. At least R20 billion was promised by the President in April to fund the health systems response. Yet the Supplementary Budget shows that only R2.9 billion of the R21.5 billion that the health sector is projected to spend on coping with COVID-19 is extra funding from the Treasury. Health departments must find the remaining R18.6 billion from within their existing 2020 budget baselines, which made no provision for dealing with this pandemic.

Furthermore, the Supplementary Budget fails to provide details on what is likely to be the most expensive aspect of the health response: how the purchasing of private health capacity will be funded. At present, provincial health departments must try to budget for this cost without knowing where the money is going to come from. The tariff that has been agreed with many private providers is R16 000 per critical care bed per day, which could quickly add up to hundreds of millions of Rands. Provinces will be reluctant to send patients to private facilities if they cannot be sure how they will cover this cost. The Minister of Finance must urgently confirm that provinces will be able to budget for COVID-19 based on need, as the government has promised.

Social grants - not reaching too many people who need them

In late April, The President, followed by the Minister of Finance, promised R50 billion for social grants in the economic relief package. This was already too late and too little given that the lockdown had already been in place for one month and the pre-lockdown poverty and unemployment levels were high. This package was to provide small top-ups to the existing social grants for six months starting on 3 May; and a new grant of R350 for approximately 8 million unemployed adults.

While the President promised a R500 top-up to the Child Support Grant (CSG) per child, the Minister of Finance and Social Development’s media statements following the President’s speech diluted this commitment to R300 per child in May and then R500 per caregiver for June to October. This effectively saved the state R13 billion but resulted in at least 7 million children continuing to live below the food poverty line, and their caregivers (mainly women) bearing an increased financial burden at a time when food prices were increasing, the school feeding scheme and ECD feeding schemes were closed and jobs were being lost.

The supplementary budget only contains R25 billion of ‘new’ money for social grants. A further R15.5 billion is re-allocated money from a projected underspend. This brings the total grant relief package to approximately R41 billion. It appears the budget that has been slashed by 50%. While the new COVID-19 grant was costed at R17 - R20 billion to reach 8 million adults over 6 months; the budget for this line item has been reduced to R10.3 billion, effectively reducing the likely people to be reached to a 4 million person limit. The reduction of the budget was explained by Treasury in a post-budget media briefing as due to ‘low take-up’. However, it is not a lack of applications that is impeding take-up but exclusionary and untransparent eligibility criteria and an inability by SASSA to process and pay the applicants timeously.

The requirement that an applicant have ‘no income’ and how this is assessed is not explained in the regulations, despite all other social grants having clearly defined means test formulae. SASSA and SARS appear to be making up the rules as they go along. SASSA recently tweeted that existing beneficiaries of the grant will be re-screened on a monthly basis to check that they have not received any other income from another source. Therefore beneficiaries who are innovative and attempt to use the small R350 to get their informal businesses or home budgets back on track by using it to generate more income will be punished and their funding withdrawn.

So far, SASSA has managed to pay 1,5 million beneficiaries. A further 6,5 million remain excluded and there is only enough budget for an additional 3,5million. Treasury warns in the supplementary budget that the budget for this grant remains subject to SASSA’s ability to spend and that it will be re-allocated in October if unspent.

Basic education

Despite the education sector facing new challenges during the COVID-19 pandemic, the supplementary budget did not allocate any additional funding to the basic education sector, and has in fact made substantial cuts to key programmes.

  • No new funding has been allocated to basic education, leaving provinces and schools to cover the costs of emergency measures from within their existing budgets.
  • R2.1 billion has been cut from the Department of Basic Education’s budget. Funding that was previously allocated to longer-term projects like school buildings and support for maths, science and technology has been reprioritised.
  • R1.7 billion has been cut from school infrastructure grants alone, and a further R4.4 billion has been reallocated from these grants to cover COVID-19 expenditure needs.

It is astonishing that in a moment which has highlighted the painful consequences of government’s failure to provide schools with adequate infrastructure and basic services such as clean water and safe toilets, school infrastructure funding has been further reduced.

BJC is concerned that these funding decisions seriously jeopardise the quality of schooling and the safety of learners, as well as further violate the state’s legal obligations to eradicate unsafe structures and provide decent sanitation. Cuts to the basic education sector in the past decade have already resulted in rising class sizes. The use of tanks to deliver water is fiscally unsustainable. Infrastructure spending can benefit an entire school community and should be undertaken concurrently with emergency water provision to provide a long-term solution to the school sanitation crisis while helping to support community development during the economic downturn.

Zero Based Budgeting and deepened austerity from 2021/22

The BJC strongly rejects the proposal that the Medium Term Expenditure Framework (MTEF) should be guided by principles of Zero Based Budgeting (ZBB). ZBB entails “rigorous analysis” (in the words of the Treasury) to decide which line items survive in the budget from year to year. ZBB thus puts everything up for potential cut backs. There was no clarity about which large programmes will be subjected to ZBB. While the BJC agrees that wasteful expenditure and corruption must be dealt with, and will again make proposals in our submission to Parliament on areas where wasteful expenditure could be reduced, we suspect that the rapid shift to ZBB is designed to accelerate austerity measures rather than ensure the budget is matched better to “need”. BJC reiterates that austerity is not economically viable and exacerbates structural inequalities.

The Coalition is concerned that the Treasury has not adequately engaged with why the current system is not working. While ZBB appeals to the markets, it is unclear what problems it seeks to solve and how the budget is presented does not shed light on this. ZBB is not a panacea to fiscal distress. South Africa needs a fiscal response that is tailored to its needs.

BJC is concerned about the will and the capacity to implement ZBB in a manner that puts the progressive realisation of socio-economic rights at its center. For ZBB to work in favour of the majority, to give meaning to redistribution and social justice, it (as with all budget decisions), must be undertaken with a commitment to transparency and meaningful participation of people who experience the greatest levels of marginalisation and exclusion. Without this commitment to practicing the principles of our constitutional democracy, the trends of the majority of South Africans bearing the cost of government failures are likely to continue.

Public debt and international loans

The BJC believes that the government can fund the spending that needs to be done to fulfil socio-economic rights, within its available domestic resources.

In his speech, Finance Minister Tito Mboweni illustrated the rising debt service cost of the government by saying that 21 cents of every rand in tax revenue goes to paying interest on the state debt. He failed to mention that 4 of these 21 cents is transferred to the Government Employee Pension Fund (GEPF) and the Unemployment Insurance Fund (UIF) as interest or levies. The Treasury has refused to participate in the public debate on how the 15-20% of the debt service costs that are paid internally within the public sector could be repurposed. These transfers should be reconsidered in order to reduce the government’s borrowing cost, which it claims is the key aim of its austerity budgeting.

We welcome the investment by other public sector entities of more than R400-billion in interest bearing Treasury bonds. The UIF has accumulated close to R150-billion in financial assets despite mass unemployment, expected to reach 50% of the workforce before the end of the year. Prior to COVID-19, the R1.8 trillion GEPF had a surplus of over R50 billion every year after benefits were paid to beneficiaries.

The Finance Minister instead sets out to borrow $7 billion (R120 billion) from international finance institutions, of which $4.2 billion (R73 billion) from the International Monetary Fund (IMF). Such an amount could easily be borrowed from the GEPF and UIF instead, in much safer Rands (avoiding exchange rate depreciation) and similarly low interest rates. BJC is curious about why the Treasury seems to be abandoning its policy to reduce foreign and short term borrowing. This move is especially worrisome when our currency might fall even more in value to the dollar, thus making repayment of the loans more expensive over time. This is of course also a clear risk, as the Treasury opposes stringent control over currency trading.

BJC opposes this policy change, undertaken as it is with no transparency about the conditions negotiated for these loans. Structural reforms imposed by international financing institutions have been shown to be race and gender blind, and this route includes the serious risk - even likelihood - of worsening the persisting and pervasive inequalities in South Africa. Treasury has not adequately engaged with how to mobilise the maximum available resources domestically. Increased lending in dollars is plainly not necessary to deal with the current crisis and we must maintain our sovereign economic policy discretion. The Treasury should not have approached the IMF without substantive engagement with the South Africans, who are the ones who will bear the costs of such a decision.

Indeed, the Supplementary Budget proposals for the 2021 MTEF look like a self-imposed “structural adjustment program” of the kind the IMF would devise for South Africa, should we run into trouble paying back their loans. For the Treasury to move closer to the IMF without a compelling reason could be interpreted as seeking political support from abroad for “structural reforms” which they have been unable to build at home. This is similar to how the opinions of discredited Credit Ratings Institutes have been used to support a conservative and contractionary fiscal agenda.

Raising more revenue

Tax shortfall but no new revenue proposals

The lockdown is estimated to cost the fiscus over R300 billion in lost tax receipts, as jobs are shed, businesses close down, people spend less money, and investors sit on their cash. Given the unsustainably high levels of inequality in the country, BJC believes that the government is missing an opportunity to redistribute wealth to help people with no savings cope with the shocks of the pandemic. The latest research shows that one tenth of the population owns 86% of private wealth (measured in property, land, business ownership and financial assets such as savings, pensions, shares and bonds, among others), while more than half the population lives below the upper bound poverty line of R1 227 per person per month (in April 2019 prices), with little-to-no savings to cushion them from financial shocks. BJC calls on government to start the process of implementing a wealth tax so that the estimated R143 billion that a graduated tax could earn the fiscus annually can become a reality in the near future. This is essential to ensure that the wealthy pay a fair share towards the recovery from COVID-19 in the years to come.

In the immediate term, the government must take the opportunity of a temporary moral high ground by increasing taxes on high incomes (above R800 000) as well as income earned from assets and inherited wealth. These should be considered solidarity taxes and used to fund increased social transfers to people most marginalised by the economic crisis and to avoid the deepening of austerity in social sector budgets.

Alternative sources of revenue

We welcome the renewed commitments from SARS to intensify efforts to collect international taxes, tackle aggressive tax planning, transfer pricing, eliminate fraud and improve taxpayer compliance, including among high net worth individuals and large complex companies. SARS Commissioner Kieswetter again repeated this morning in SABC News, that illicit financial outflows amount to well over R100 billion per year, which if collected, would greatly reduce our annual borrowing requirement.

We see however, no trace of any policy change from the side of the Treasury or any awareness of this in the Finance Minister’s speech or any concrete proposals. Given the corporate bias that remains at the Treasury, our fear is that relaxed control of cross border transactions are viewed as a part of an investor friendly environment in which SA “must” compete for foreign capital, including by means of relaxed controls. We will see if the new commitments by SARS to tackle the problems bear fruit in this context.