South Africa: Government tables medium-term budget; sticks to debt stabilization plan but raises reliance on public wage cuts
On 28 October, the government unveiled the FY 2020 medium-term budget policy statement to parliament, reaffirming its commitment to fiscal consolidation—as established in June’s supplementary budget—and to bringing back debt stocks to a sustainable level. However, the viability of the stabilization plan hinges on successful public sector wage negotiations, with a reduction in the public wage bill central to the government’s aim.
The policy document maintains June’s forecast of a 15.7% of GDP consolidated budget deficit for the current fiscal year—which runs until March 2021—taking into account declining revenues and higher spending due to the Covid-19 pandemic, and higher debt-servicing costs. Meanwhile, the statement projects a more measured consolidation path compared to the June budget, foreseeing a larger shortfall of 10.1% of GDP in FY 2021–2022 (June: 9.2% of GDP), before gradually narrowing to a deficit of 7.3% of GDP by the end of the medium-term expenditure framework in FY 2023–2024.
The government also kept its forecast of public debt rising from 63.3% of GDP in FY 2019–2020 to 81.8% of GDP by March 2021. However, due to the slower consolidation path, the peak and stabilization of debt is seen at 95.3% of GDP in FY 2025–2026—a higher level and later date compared to the June estimate. The Treasury aims to achieve a primary surplus by FY 2025–2026 through cutting expenditures by roughly ZAR 300 billion (around USD 19 billion) over the next three years, most notably by reducing the public wage bill by ZAR 236 billion. This is a larger cut than announced in February and amounts to 0.8% annual average nominal growth of the wage bill over the next three-year period, markedly limiting growth of employee compensation in real terms.
However, reaching the projected spending cuts relies heavily on tough negotiations with public sector trade unions. Moreover, social and political factors, such as high levels of inequality and stark divisions within the governing African National Congress, will present hurdles for large cuts to expenditure.
Commenting on the feasibility of the government’s consolidation plan, Andrew Matheny and Dylan Smith, economists at Goldman Sachs, noted:
“The credibility of the fiscal consolidation continues to hinge on political developments in our view, and the higher projected savings from the public wage bill renders outcomes of negotiations over wage settlements even more important to the fiscal outlook. While we think that a below-CPI wage settlement is likely to result from negotiations, we are sceptical that the full extent of the cuts envisaged by National Treasury will be politically feasible.”
Moreover, Trieu Pham, analyst at ING, highlights further obstacles:
“[…] Contingent liability risks from SOEs remain very high and unaddressed, notably with Eskom remaining highly dependent on government support and operational performance set to worsen.”