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MTBPS 2021: Tough Times Ahead But It Isn’t All Bad News

South Africa’s Minister of Finance, Enoch Godongwana, presented his maiden Medium Term Budget Policy Statement (MTBPS) speech to Parliament yesterday, against a backdrop of the country emerging from the third wave of COVID-19 but very much in the dark due to the ongoing rolling blackouts.

The Minister acknowledged the very high expenditure on social wage[1] – at 59.5% of non-interest spending – a figure that can only be expected to rise in the short to medium term given the record levels of unemployment and poverty, coupled with a decade of decline in GDP growth.

Additionally, public sector borrowing has continued to grow to worryingly-high levels. The effect of such levels is that 21c of every R1 of revenue is paid in interest. The sustainability of such spending – which exceeds the expenditure on health, social development, or peace and security – is clearly not possible in the current economic climate.

On the bright side, higher commodity prices have driven economic growth and tax revenue – although revenue remains well below pre-pandemic levels.

Despite this boost, investment and employment remain at depressed levels. For instance, the unstable electricity supply has severely hampered investment. Other long-standing obstacles such as inefficient and expensive rail freight, inadequate broadband spectrum and red tape remain.

Global borrowing conditions are becoming less favourable, which will likely lead to a rise in borrowing costs.

The good news is that government has indicated a commitment to accelerate structural reforms with a view to promoting growth, whilst exercising fiscal discipline to narrow the deficit and stabilise debt. Their projection is that from 2024/25 they will be able to achieve a primary budget surplus – revenue exceeding non-interest spending.

Even more encouragingly, the Minister noted that “government intends to shift expenditure away from consumption and crisis response towards growth-enhancing investment.”

Prior to the pandemic economic activity had been on the decline. The impact of this on revenue collections is clear – having remained well below pre-pandemic expectations. Revenue from 2020/21 through 2022/23 is forecast to be R284.7 billion below the 2020 Budget projections. However, owing to faster economic growth, revenue collection has improved in the current year compared with the 2021 Budget forecast.

The revenue windfall will partially support increased allocations for urgent social and economic priorities, increasing non-interest expenditure. Government will maintain such allocations should revenue performance improve over the medium term.

Government debt has been forecast to stabilise at 78.1% of GDP by 2025/26. Whilst this is an improvement on the 2021 National Budget figure of 80.5%, it remains uncomfortably high and both underlines and exacerbates the structural problems in the economy. Government is addressing this and gross borrowing requirements are falling. Over the medium term the gross borrowing requirement is projected to average R503 billion.

Revenue collections in 2021/22 are expected to be approximately R120 billion higher than projected in the 2021 National Budget. Projections for 2022/23 and 2023/24 have been revised upward by R69.8billion and R59.5billion respectively.

The bulk of the improved 2021/22 revenues are from income taxes for individuals (R26.1billion) and companies (R75.5billion), with almost half of the improved corporate tax take coming from mining companies.

Despite the government’s firm commitment to fiscal discipline and consolidation, it now faces certain risks:

  • A slowdown in economic growth, a reversal of the commodity cycle or tightening of global financial conditions would negatively affect government revenues.
  • The evolution of COVID-19 and slow progress in vaccine rollout reinforces uncertainty and poses risks to economic recovery.
  • Slow implementation of structural reforms continues to weigh on business confidence and private investment. Electricity supply constraints, which could worsen over the short term, are a drag on economic growth. In contrast, progress on energy reforms poses upside risks to fixed investment and the overall economic outlook.
  • A further deterioration in the public finances due to various spending pressures and the materialisation of contingent liabilities could trigger further credit rating downgrades.
  • Pressures on the government wage bill ceiling could undermine fiscal consolidation measures.

The fiscal framework does not include any additional support to state-owned companies, but the poor financial condition and operational performance of several of these companies remains a large contingent risk. A number of entities may request further bailouts.

Government is strictly enforcing minimum criteria before guaranteeing the debt of state-owned companies, as outlined in the 2021 Budget, which has led to a decline in guarantee requests. Nonetheless, the broader context of financial distress, weak governance and unsustainable operations in many of these companies remains unaddressed.

Interestingly, no spending reductions were proposed in the 2021 Medium Term Budget Policy Statement (MTBPS). This is largely due to improved revenue, which will help lower the fiscal pressure posed by increasing debt levels over the medium term.

It would also appear that National Health Insurance will not be implemented in the near term, given Minster’s comment that there is insufficient capacity in the health sector to work substantively on national health insurance.

With all of that said, perhaps some of the best news for South Africans, is the fact that no proposed tax changes were announced this time around. At the very least, this might allow the country to continue recovering without having to adapt to any additional surprises in their tax bills.