Finance minister Enoch Godongwana’s maiden medium-term budget policy statement (MTBPS) will have to carefully navigate mounting pressure to raise spending on items such as social grants and salaries in the face of a temporary revenue boom that has allayed government’s fiscal woes, if not eradicated them.
This is the view of Absa’s economics unit, led by senior economist Peter Worthington, which is predicting that tax overruns for the 2021/2022 fiscal year could hit R169bn compared to the targets set out in the February budget thanks to a better-than-expected economic recovery and a commodity price boom that has boosted corporate taxes and mining royalties.
This, aided by a recent upward revision of nominal GDP, means the budget deficit could come in at 5.6% of GDP, significantly lower than that forecast in February, according to Absa’s estimates.
In the February budget the consolidated deficit was forecast at 9.3% of GDP for 2021/2022, declining to 7.3% of GDP and then 6.3% of GDP in the following years.
According to Absa’s forecasts, released in a note, the revenue overrun could extend into next year, though Worthington said this “is highly contingent on where exactly commodity prices go over the next year”.
Nevertheless, he said the good revenue performance relative to the February 2021 budget targets will likely carry forward into future years, even though SA’s growth momentum is likely to soften and commodity prices are already down 19% from their peak in May and “are unlikely to fully recover all of their recent losses”.
However, large uncertainties about spending abound, which is also expected to exceed the targets set out in February’s main budget, Worthington said.
“We believe that significant expenditure cuts are unlikely, given the imperative of supporting the economy, the difficulty the government has in trying to implement zero-based budgeting, and the likely disinclination of [President Cyril] Ramaphosa’s government to do anything radical with a factionalised party and an elective conference looming in a little over a year,” he said.
The MTBPS will certainly confirm that SA is in much better fiscal shape than expected at the start of this year, said Worthington, but “it will also likely highlight that the challenge of stabilising the fiscal ship is an ongoing one”.
Godongwana has publicly stressed his commitment to the fiscal consolidation path set out by his predecessor, Tito Mboweni, calling it “sacrosanct”.
But he will have to pay for the public sector wage settlement, which includes a monthly posttax R1,000 cash gratuity, expected to cost in the order of R19bn and which the Treasury has said will come from further reprioritising of existing budgets. The Constitutional Court, meanwhile, is yet to rule on the matter of the state’s refusal to pay increases for the final year of the 2018 wage deal.
In the face of a tougher lockdown during the third wave of the pandemic and the violent unrest in July, the government extended the R350 social relief grant to March 2022. Pressure is mounting to institute a permanent basic income grant.
“We believe that the exceptional outperformance of tax revenues will soften somewhat and that new spending obligations in the form of public sector wages and income support for low-income households are being baked into the politics around the fiscal framework,” said Worthington, adding that this comes “without much scope for offsetting expenditure cuts elsewhere”.
When it comes to the public sector wage bill, Worthington said “the risks seem tilted to the upside here since after two years of relative restraint, we believe the unions will be pushing for a big wage increase once the current deal expires in March 2022”.
“The ANC’s elective conference in December 2022 suggests that the unions will have some leverage,” he said.
There is strong political and social pressure on the ANC and the government to expand the social relief of distress grant into a formal basic income grant, Worthington noted. But this is “not fiscally feasible, given the narrow size of SA’s tax base, which already struggles to support normal old age and child support grants” amounting to R227bn in the current fiscal year.
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