In this time of Covid-19 many of the normal budget metrics have been thrown out of the window. In this surreal period, a budget deficit of 9% of GDP for the fiscal year starting on April 1 2021 is not profligate. Rather, it is a solid reduction from the 10.1% of GDP deficit forecast in the October 20201 medium-term budget policy statement.
When looking ahead to what metrics would determine a “good” budget in the Covid environment we considered the quantum of revenue increase, the extent of expenditure slippage, the composition of the expenditure slippage, and the effect on the amount of debt issued.
The quantum of the increase in revenue. Estimates for the current-year revenue overrun have varied widely, from a R50bn increase to as much as R130bn. In the end, the Budget Review forecasts a revenue increase of R103bn for the current fiscal year, and R85bn for 2021/2022 starting on April 1. The current projection still means current-year revenues are about R200bn less than projected in February 2020. However, it does indicate that the erosion in the economy was about a third less than initially feared.
Despite expectations, there were no tax hikes in the budget, as the Treasury noted that after five increases in personal income taxes in recent years the evidence now suggests that tax increases are likely to have a larger negative effect on growth than spending reductions at this point.
The extent of expenditure slippage. The concern with revenue overruns, despite the weak overall state of revenue, is that politicians and interest groups, notably public-sector unions, will motivate for increased spending. The good news is that the 2021 budget has held the line on overall expenditure. There is a R33bn increase in overall expenditure in 2021/2022, but it then falls below projections in the medium-term budget policy statement in 2022/2023 and 2023/2024.
The composition of expenditure slippage. This was very good news. The budget holds the line on government wages by in effect keeping wages flat over the next three years. The Budget Review points out that SA now spends 14.8% of GDP on state wages. This compares with Mexico and Germany at about 8%, Poland at 10% and France and Canada at 12%. Among the larger emerging markets and Organisation for Economic Co-operation and Development (OECD) countries, only Denmark and Norway spend a greater share on wages. And most of these countries get considerably more in return for these salaries.
The R33bn rise in expenditure is spread between the vaccine rollout, the management of Covid and R11bn for a public employment initiative to in effect replace the special Covid grant that expires in April. While the R5.2bn budgeted for vaccines this year looks light, it appears that vaccines will also be sold on to private medical schemes, limiting the need for government funds.
Limited allowance is made for required recapitalisation of state-owned enterprises. As most of these entities have yet to produce long-term plans to be viable, this is correct. But there are likely to be further allocations in coming years.
The quantum of the reduction in issuance. Since 2009, the Treasury has committed itself to containing the wage bill, and the rest of the cabinet and the unions have largely ignored this. Add in disappointing growth and revenue shortfalls, and it is not surprising that the Treasury has run a progressively more conservative debt-issuance strategy. In the face of fragile demand it has kept weekly auction levels high in recent months, incurring deep costs as discounts on bond issuance have risen sharply. By the end of the current year, it will have borrowed R670bn, and had to offer discounts of R72bn to raise the money. That is very expensive money.
This “insurance” issuance strategy has raised serious questions about the Treasury’s confidence in the consolidation it announced in the medium-term budget policy statement. So it was very positive to see the Treasury cutting issuance forecasts for 2021/2022 by R92bn for long-term bonds and R58bn for short-term T-bills. This is a strong positive signal to the bond market that the Treasury believes its own budget numbers.
We need reform for growth. The key now is whether the rest of the cabinet will adhere to this rather excellent budget, especially the flat wage profile. Even with wage restraint, the budget is a necessary though insufficient solution to SA’s debt problem. Growth is still required. For that we need the rest of the cabinet to implement reforms necessary to generate growth.
• Moola is head of SA Investments, and Kobus an analyst, at Ninety One.
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