South Africa: New medium-term budget explained
After postponing its presentation twice, on 11 November the government set out the FY 2021–2022 medium-term budget policy statement before parliament, reaffirming its commitment to fiscal consolidation and to bringing debt stocks back to a sustainable level. However, several risks could hinder the stabilization of debt levels, including pressure on the government over the public wage bill, slowing economic growth, waning reform momentum and potential credit rating downgrades.
The more ambitious deficit reduction comes against an improved growth outlook amid the easing of Covid-19 restrictions—with the government expecting the economy to return to pre-pandemic levels in 2022—and greater revenue prospects resulting from higher commodity prices and increased tax income. Moreover, the government upgraded its near-term economic growth expectations, now anticipating the budget deficit to narrow to 7.8% of GDP for the current fiscal year—which runs until March 2022—compared to 9.3% of GDP in February.
Meanwhile, barring no major shocks or unbudgeted spending commitments, the gradual reduction of the deficit will continue in the coming years, with a projected shortfall of 6.0% of GDP in the next fiscal year and 5.3% of GDP in FY 2023–2024. For FY 2024–2025, the government has penciled in a spending gap of 4.9% of GDP. By consolidating its budget deficits, the government aims to reach a primary fiscal surplus, thus ultimately ending the fiscal consolidation path.
Regarding debt, the government still sees the debt-to-GDP ratio increasing in the coming three years, while the current fiscal year’s forecast was revised to 69.9% of GDP (February: 80.3% of GDP). Meanwhile, the peak and stabilization of debt is now seen at 78.1% of GDP in FY 2025–2026, which is when the Treasury aims to achieve a primary surplus.
With regard to spending, debt-servicing costs are seen increasing further over the medium term due to the persistent main budget deficit, a weakening currency and higher interest rates. Covid-19 social relief will also remain a key pillar of expenditure, with support measures set to remain in place until March 2022. However, the fiscal framework does not include any additional support for state-owned companies.
That said, achieving the government’s projections will rely heavily on uncertain negotiations with public sector trade unions, while social and political factors, such as a high unemployment rate and elevated inequality levels, will pose hurdles for large expenditure cuts. Commenting on policies that the government intends to tackle, Andrew Matheny and Bojosi Morule, economists at Goldman Sachs, explained:
“On structural reforms, Minister Godongwana emphasised developments in rail logistics (corporatisation of Transnet and allowing third-party freight access for private operators by end-2022), progress on the spectrum auction and e-visas that will be rolled out by March 2022. In the energy sector, the speech focused on developing renewable energy capacity to diversify primary energy sources and reduce reliance on Eskom, as well as on allowing private power generators to sell directly to customers.”
Meanwhile, Sonja Keller and Sean T. Kelly, analysts at JPMorgan commented:
“We view the Medium-Term Budget Policy Statement (MTBPS) as striking the appropriate balance between structural spending restraint and windfall gains in an economy with still considerable slack. […] We see some upside risk to the near-term revenue outlook, yet beyond the next two years the likely downside risk from delayed structural reforms and soft trend growth probably dominates. In our view, the targeted small primary surplus in FY 2024 may not yet suffice to steady debt-to-GDP, against Treasury forecasts, though the debt rise should substantially slow. All-in-all, we believe the update in the MTBPS presented by new finance minister Godongwana was broadly in line with our pragmatic expectation, but with a somewhat firmer commitment to navigate spending pressures than we anticipated and some cushions built in.”