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2020 Medium Term Budget Policy Statement

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2020 Medium Term Budget Policy Statement

12th November 2020

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Finance Minister Tito Mboweni recently delivered the 2020 Medium-Term Budget Policy Statement (MTBPS). Expenditure must be cut and growth boosted in order for South Africa to avoid a sovereign debt crisis. 

The proposed reduction of the public sector wage bill was a focal point of the MTBPS. This follows the Presidential Economic Advisory Council’s remarks that it will not be possible to shrink the ballooning government debt with our current wage bill. At present, about 60% of all taxes collected will go to pay public sector wages. 

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Over the past 5 years, public sector employee compensation grew 7.2% a year on average, well above inflation. Government spending on wages more than tripled between 2007 and 2019. The Minister indicated that the wage bill will have to grow much slower over the next 5 years. Therefore, the public sector wage bill is proposed to grow by only 1.8% in 2020 and average annual growth of 0.8% over the 2021 medium term expenditure framework period. Government aims to reduce the wage bill by R160-billion in 3 years. 

Some key takeaways: 

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  • Gross debt is anticipated to grow from about R4-trillion this year to R5.5-trillion in the 2023/2024 fiscal year.
  • The South African economy is expected to contract by 7.8% in 2020.
  • The medium term budget policy statement tables a 5-year fiscal consolidation trajectory that promotes economic growth while curbing debt. The debt to-GDP ratio is anticipated to stabilise at around 95% within this 5 year period.
  • The South African economy is projected to grow by 3.3% in 2021, 1.7% in 2022 and 1.5% in 2023.
  • Debt service costs are revised down by R3.4-billion.
  • The midterm policy framework narrows the main budget primary deficit from an anticipated R266-billion in 2021/22 to R84-billion in 2023/24 and a surplus by 2025/26.
  • Government will be pursuing further steps to make cross-border business easier. 

The following exchange control amendments have been announced:

  • All debt, derivatives and exchange traded instruments referencing foreign assets, that are inward listed, traded and settled in Rand on South African exchanges, will be classified as domestic.
  • The full ‘loop structure’ restriction will be lifted to encourage inward investments into South Africa, subject to reporting to Financial Surveillance Department of the South African Reserve Bank as and when the transaction is finalised.
  • South African corporates, excluding State Owned Companies, may borrow offshore by way of bond and/or note issuances with recourse (for example, a guarantee) to South Africa, without prior approval from the Financial Surveillance Department.

In summary, the Minister proposed the shifting of spending from consumption to investment, the allocation of resources for the Economic Reconstruction and Recovery Programme and constraining non-interest spending growth.

Written by Dale Cridlan, Head of Tax at Norton Rose Fulbright

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