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The good, the bad, the ugly… and the bizarre of the MTBPS

by | Oct 27, 2020 | Personal Finance

The government’s Medium Term Budget Policy Statement (MTBPS) was presented by Finance Minister Tito Mboweni on Wednesday 28 October 2020 – and it wasn’t pretty!

South Africa’s debt situation is downright dire!
Minister Mboweni said “We used to boast about the fact that we were one of the richest countries in Africa – but the situation has changed – and SA needs a mindset change, with rising debt –to – GDP ratio and rising debt servicing costs.”

To better understand the MTBPS better, here are some clear definitions of important phrases.

MTBPS: The MTBPS plots the course forward for government spending over the next 3 years and reflects the state of public finances.

GDP: This is the abbreviation for Gross Domestic Product, and that is the total monetary value of all finished goods and services made within a country during a specific period, and it indicates the overall health of a country.

Debt-to-GDP ratio: This is a ratio comparing a country’s public debt to it’s GDP. By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts.

The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default. A study by the World Bank found that if the debt-to-GDP ratio of a country exceeds 77% for an extended period of time, it slows economic growth.

Key take-outs from the MTBPS

THE GOOD

  • The Minister proposed consolidated spending of R6.2 trillion over the 2021 Medium Term Expenditure Framework, of which R1.2 trillion goes to learning and culture, R978 billion to social development and R724 billion to health.
  • Subsidies of R2.2 billion will support the Social Housing Programme aimed at poor, working South Africans. A further R6.7 billion has been contractually committed to this programme. Government expects that the total investment from this programme will be R20 billion over the next 10 years.
  • The Student Housing Programme worth an estimated R96 billion is underway. It will service nearly 300 000 students a year when complete

 

THE BAD

  • Prior to the pandemic hitting SA, the country was facing a debt to GDP ratio of 63.3% – but it is now expected to increase to 81.8%
  • If government does nothing to slow down rising debt levels – we could go over 100% of GDP by 2023/ 2024
  • Government is currently borrowing R2.1 billion a day.That means that around 21c out over every rand that government earns now goes towards paying interest on government debt.
  • National Treasury expects the economy to contract by 7.8% in 2020 due to the Covid-pandemic. This is worse than the 7.2% projected in June.
  • Compared to the 2008 global financial crisis, SA is in a far worse position now. We are facing our worst recession in 90 years due to the effects of Covid-19 and lockdown.
  • South Africa’s debt predicament is due to massive government overspending, particularly on civil servant wages (which now represents a third of total spending).
  • Government plans to slam the brakes on public servants’ wage increases
  • The rand was largely weaker on Wednesday after the MTBPS . At 5pm its was trading at R16.39 to the dollar, 26c weaker than 24 hours before that, Against the pound, the rand was 21c weaker at R21.26 – and 14c weaker against the euro at R19.22.

 

THE UGLY

Government once again “bailed out” SAA with R10.5 billion, what does this mean for SA and where did the money come from if we don’t have money?

South Africa has breached it’s expenditure ceiling by R45.2billion in the current year due to government’s Covid-19 response – so many economists are baffled that government chose to once again bail out SAA (South African Airways ) to the tune of R10.5billion.

As for where the money will come from – the SAA R10.5 billion will mainly come through through reductions of the baselines of national departments and their public entities, and provincial and local government conditional grants.

This essentially means that the already struggling public are having important services like police and health massively affected – to fund SAA.

These figures in the totals below, represent the amount in millions taken from each department to fund SAA to the tune of R10.5billion

This makes it clear to see that R1.2 billion in the allocation to the police, as well as R1.1 billion from the higher education and training budget were shifted towards SAA. Other big contributions came from transport (more than R680 million) and health (almost R695 million).

So at the end of the day, it is once again ordinary South Africans who will suffer a lack of services because of ailing state owned enterprises.

Table 3.1 - The good, the bad, the ugly…and the bizarre of the MTBPS

Table 3.2 - The good, the bad, the ugly…and the bizarre of the MTBPS

And finally…THE BIZARRE

Where government says the R500 billion Covid relief went:

In April this year, government announced a major fiscal relief package of around R500 billion or 10 percent of GDP. This is how Minister Tito Mboweni said it was spent.

  1. More than R30 billion for health and other frontline services.
  2. Support vulnerable households which is now in excess of R50 billion.
  3. More than R40 billion for wage protection through the UIF.
  4. Around R100 billion for job creation initiatives, which will now be spread over the MTEF.
  5. R200 billion for a credit guarantee scheme.
  6. R20 billion towards municipalities to assist them with COVID-19 related activities.
  7. R70 billion towards emergency tax measures. 

(As a tax-paying South African citizen I definitely would have loved more detail and proof of the above).

So what does this mean for ordinary South Africans?

Everything points to the fact that it will take us the best part of 5 years to get back to the 2019 levels of economic activity – and that should scare us into getting our finances into order.

We need to:

  • Get rid of our debt
  • Start saving
  • Draw up a budget and stick to it
  • Support our local businesses
  • Get a side hustle

 

The struggle is real and the road is long. We need to get our finances in order.
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