Here is what to expect when Tito Mboweni delivers his special budget

Treasury’s ‘special budget’ next week is up against significant challenges, says Bernard Sacks, tax partner at financial services group, Mazars, following the outbreak of the Covid-19 pandemic, and resulting lockdown which has caused economic carnage.

Finance minister Tito Mboweni, presented his National Budget to Parliament against a backdrop of weak economic growth, coupled with high unemployment, a sluggish economy and a looming credit ratings downgrade.

The projected deficit was high, at R370 billion – and the debt-to-GDP ratio was projected to grow to 65%. Optimistic projections of income were made. A growth rate of approximately 1% was predicted, Mazars said.

On Wednesday, 24 June, minister Mboweni will table a Special Adjustment Budget.

“This is an extraordinary event, precipitated by the effect of the Covid-19 outbreak that has caused so many deaths and ravaged great parts of the economy,” said Sacks.

“As a result of the lockdown, certain sectors of the economy have still not been able to recommence any operations, while others have only been able to recommence to a limited extent. Emergency funds have had to be found and additional borrowings sought to support relief measures.

“These factors have resulted in the need to adjust the figures previously tabled in the February Budget Speech.”

Sacks said that the difficulties faced by minister Mboweni are now immeasurably greater.

“Ways must be found to fund the steep rise in healthcare spending. With South Africa still firmly on the upward curve of Covid-19, there will be large increases in healthcare costs. Social grant spending will show steep increases as the unemployment rate soars even higher.”

The impact will be all the greater, given that tax collections are steeply down, said Sacks. Some of the reasons are that:

No excise duties or VAT on tobacco products have been collected since the beginning of lockdown in late March, due to the nationwide ban on the sale of tobacco products;
Until the reduction to level 3 lockdown, a similar situation prevailed regarding liquor products, and due to the restricted number of trading days and the ban of on-site consumption of alcohol, these sales remain depressed;
Employees’ tax take has been reduced considerable because large numbers of employees have been laid off or are working reduced hours;
VAT collections are steeply down due to the significantly less business being conducted because many sectors of the economy are/have been dormant;
Imports have been reduced, resulting in lower customs duty collections
Business profits are down, the consequence of which is that provisional tax payments will be reduced, with the effect at the time of the first provisional tax payment likely to be particularly marked ( the provisional tax deferral relief measure will, in any event, reduce the cash flow to the fiscus); and
Collections of fuel levies have been reduced as a result of reduced travel.
The effect of the lockdown on the economy, and some of its strange regulations, has set the economy back by some years. Estimates of the projected recovery period vary, but it is likely to take a minimum of three to five years, and possibly longer, for South Africa to dig ourselves out of the hole, said Sacks.

“The extent of the contraction of the economy is unknown but, best case estimates put it at around 5%, with other projections at around 16%,” he said. The World Bank said last week that the country’s economy could shrink by 7.1% in 2020.

South African Revenue Service (SARS) Commissioner Edward Kieswetter recently estimated the shortfall in collections at around R285 billion, Mazars noted.

When this shortfall is aggregated with the additional spending in previously announced relief measures, further healthcare costs associated with Covid-19 and possible further relief measures, it is clear that the impact on the economy will be severe, said Sacks.

The ratings downgrade, announced the day after SA’s national lockdown commenced on 27 March, is a further setback, he said.

“At present the infection rate in the Western Cape is steeply on the rise, with other provinces following on a lower trajectory.

“While having it may be good to allow for healthcare services to move resources around the country to where they are needed, having the virus rotate around the country lengthens the period for which South Africa is likely to be in lockdown with closed borders,” Sacks said.