17 January 2020
This budget was prepared and tabled in response to major changes in expected revenue generation and the channelling of expenditure after the Covid-19 outbreak and managed to address the immediate issues confronting the fiscus. The main budget balance is now expected to widen to 14.6% of GDP in fiscal year 2020/21 (February
projection: -6.8%). Gross national debt is expected to increase to 81.8% of GDP (February projection: 65.6%). The expansion is mainly due to lower revenue collections and higher pay-outs from the UIF.
Expenditure adjustments
National Treasury expects expenditure to increase to R1.573 trillion from R1.537 trillion projected in the February budget. This mainly reflects support extended to state-owned entities, the COVID response package and debt service costs.
While the rise in total expenditure reflects a rise of R36 billion, the total fiscal response to the pandemic resulted in R145 billion additional spending. Of this amount, R122 billion was allocated to the fiscal relief package, R3 billion to recapitalise the Land Bank and R19.5 billion for provisional allocations for Covid-19 fiscal relief. National Treasury was able to reprioritise R109 billion, but the remaining R36 billion will be financed through an increase in the main budget deficit.
Revenue
The revenue shortfall was larger than anticipated; tax relief measures, business closures as well as lower personal income taxes owing to job losses are expected to result in a R304.1 billion tax shortfall in the current financial year. Treasury noted that domestic VAT and pay-as-you-earn has seen the largest shortfalls.
National Treasury indicated that tax revenue should increase over the medium-term expenditure framework (MTEF) on the back of improved tax collection as enforcement is strengthened and other revenue measures are put in place.
Overall impression
While today's budget painted a sobering picture of the current circumstances, it did not provide much detail on how government will “close the mouth of the hippopotamus”. The budget does, however, note that more details on how the government is planning to consolidate the budget will be provided in the MTBPS.
Market impact
This budget certainly seems more bond-friendly than equity-friendly as no immediate increases in the overall size of bond issuances are expected and a commitment to running a primary surplus in 2023/2024 will be positively received by debtholders. Yields have come down slightly across the curve. The rand depreciated to R17.40 as the budget was tabled but has again strengthened to within the day's trading range towards the end of the day. The equity market ended lower, in- line with global markets. Lower consumption expenditure by government and the hinting of potential tax increases to come will be negative for the equity market in the short to medium term. A commitment to structural reform and an ambitious infrastructure programme could boost growth longer term, which will have an ultimately beneficial impact on the market if executed.