Newly minted Finance Minister Enoch Godongwana tabled his first Mid-Term Budget Policy Statement (MTBPS) on 11 November 2021, following several postponements. His predecessor, Tito Mboweni, often provided a much bleaker picture than expected. However, Godongwana provided a largely expected MTBPS but continued on the fiscal consolidation path his predecessors have tried to achieve.
Statistics South Africa (Stats SA), earlier in the year, revised the size of our gross domestic product (GDP) and concluded that the economy was, in fact, about 11% larger than previously stated. Following this re-basing, it is important to note that most figures stated as a percentage of GDP, like the fiscal deficit and government debt-to-GDP, would have improved even when their absolute level remained unchanged.
However, it must be noted that marginally larger than expected tax revenues have improved the fiscal deficit for 2021/22. These were on the back of a stronger than expected economic recovery coupled with higher corporate profitability levels from the mining sector. A couple of slippages on the expenditure side have included the unanticipated reinstatement of the social relief and distress grants, along with higher public sector wage payments.
The marginally narrower fiscal deficit has improved the National Treasury’s government debt-to-GDP, which is currently sitting around 70% and expected to peak around 78% in 4-5 years. Part of their fiscal consolidation efforts, which are targeted at curbing non-interest expenditure, coupled with the temporary boost in tax revenue, should help ease public sector debt requirements. That will help reduce the burden of debt-servicing costs, which continue to be the fastest-growing expenditure item.
The government plans to redirect spending away from wages and social grants towards growth-enhancing initiatives, such as economic development and capital formation. This is significant as the wage bill is the government’s largest expenditure item, currently in excess of 30% of its budget.
Economic development and capital formation are essential in generating future economic growth and more government revenue. However, containing the wage bill has proved a challenge for government in the past.
State-Owned Enterprises (SOEs), in particular Eskom, also continue to prove a challenge to the fiscus. Stable electricity generation and supply remains critical for the economy to realize full economic potential. The Finance Minister has committed to diverting spending away from the utility. This is aimed at shifting the country’s reliance for power on the ailing utility to independent power producers.
Over the longer-term, the government expects a competitive energy market to ensure stable electricity supply whilst containing the cost of electricity. This will be a tough, balancing act, but it is essential in fuelling economic growth.
The National Treasury is expecting the economy to grow by a revised 5.1% in 2021. The stronger than expected recovery indicates that the economy is now expected to take less than three years to recover from the losses incurred in 2020 due to the Coronavirus (Covid-19).
However, the pandemic remains the single-largest threat to economic growth over the short-to-medium term. Local economic recovery efforts rely critically on the success of the vaccine procurement and rollout program, as evidenced in other nations.
In the long-term, structural issues as they pertain to persisting twin deficits on the fiscal and current accounts, struggling SOEs, high levels of unemployment, low confidence and spending levels from both consumers and businesses will provide headwinds for economic growth. Economic growth is, therefore, expected to be below full economic potential, with a persisting negative output gap, post the Covid-19 economic recovery, unless these structural issues are addressed.
For any meaningful economic impact, results will be required in addition to reasonable budgets, policies and forecasts. These structural issues have dragged the local economy’s performance for the past 10 to 15 years, with each budget forecast by the National Treasury seeing them stabilise in a period of 3 to 5 years, which has come and gone with no stabilisation in sight.
The danger of a budget that assumes that particular reforms will be taken is that it does not account for the repercussions of failing to do so. Perhaps a positive to Mr Mboweni’s surprise budget forecasts is that they shocked us with the reality of where our economy was headed, should decisive action not be taken.
Ricardo Smith is the head of investment strategy at Absa Global Investment Solutions.
* The views expressed here are not necessarily those of IOL or title sites.
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