Finance minister Enoch Godongwana’s medium-term budget policy statement (MTBPS) followed the path of fiscal consolidation mapped out by his predecessor, Tito Mboweni, maintaining efforts to narrow the government’s budget deficit and stabilise SA’s still troublesome debt trajectory.
But substantial risks to the improved fiscal outlook and the underlying economic recovery remain, which could undo the effort to close the “hippo’s mouth” and avoid the sovereign crisis Mboweni warned of.
These include slower global growth, or a reversal of the commodity cycle, that has come to the rescue of government finances and the failure to implement structural reforms, which continue to sap business confidence, investment and competitiveness.
Not least of these is electricity supply — with Godongwana delivering his speech under the pall of load-shedding.
The Treasury warned that the risks to the fiscus flagged in February’s budget have already materialised — notably the recent public-service wage agreement, which breached the budget ceiling for employee compensation by R20.5bn, and the deteriorating financial position of major state-owned companies.
Godongwana’s maiden budget, nevertheless, confirmed the much better fiscal picture promised by a better-than-expected economic recovery and a commodities surge that boosted revenues — which are forecast to come in at R120.3bn more than was expected in February. The technical effects of the recent rebasing of SA’s GDP has also provided support.
“The MTBPS charts a course that demonstrates government’s unflinching commitment to fiscal sustainability, enabling long-term growth by narrowing the budget deficit and stabilising debt,” Godongwana said.
“Critical to the fiscal path we have chosen is the need to be clear and unambiguous on the trade-off we are willing to make as a nation,” he said.
The Treasury is now forecasting growth for 2021 to come in at 5.1% — up from February’s 3.3%, though growth moderates back to more muted levels of 1.8% in 2022 and 1.6% in 2023.
The tax windfall — which comes with similar improvements of R69.8bn and R59.5bn expected in 2022/2023 and 2023/2024, respectively — is a “welcome once-off boost”, but revenue remains well below pre-pandemic projections.
The state will use some of the tax boon to reduce its deficit, which it now expects will reach 7.8% of GDP in 2021/22 before declining to 4.9% of GDP in the outer years, as well as provide short-term relief to the most vulnerable and cover the higher costs of the public-service wage agreement.
With the breathing room provided by the tax overrun, the Treasury faced mounting pressure to institute more social support in the face of a basic income grant.
But the MTBPS underscored that expanded social protection could not be extended without better growth or it risks undermining macroeconomic credibility and has detrimental effects on the economy.
“We should not make permanent spending commitments from short-term revenue benefits,” Godongwana said.
There is, however, “light at the end of the fiscal consolidation tunnel”.
Godongwana mapped out a fiscal course for the coming three years that will result in a primary budget surplus — or where revenue is higher than non-interest spending — by 2024/25, which will bring an end to fiscal consolidation.
SA’s debt trajectory is not as steep at that forecast in February, with gross loan debt to GDP expected to reach 69.9% in 2021/2022 and rise to 78.1% in 202520/26. This is well down from February’s forecast of 81.9% in 2021/2022 and a peak in 2025/2026 of 88.9%.
Debt levels remain elevated, however, with debt service costs set to absorb an average 21c for every rand of revenue in the coming three years.
Elevated debt redemptions will further reduce fiscal space over the medium term, the Treasury warned, as R423.4bn of debt borrowed in previous years matures.
“Rising debt service costs consume an increasing share of national income, crowding out spending on critical programmes necessary to alleviate poverty and create a foundation for faster economic growth,” the Treasury noted in the policy statement.
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