BUDGET | Govt now expects economy to recover much sooner, with debt ratio also easing

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Government has started a process of reopening the SA economy in a gradual process.
Government has started a process of reopening the SA economy in a gradual process.
  • The South African economy has benefited from a surge in commodity prices in the past year, but the resulting spike in GDP growth and tax revenues is temporary, says National Treasury.
  • Treasury has revised the GDP growth outlook for 2021 from 3.3% projected in February to 5.1% but stressed it is imperative to implement structural reforms.
  • The gross debt-to-GDP ratio has also been revised to 69.9% from 74.1% projected in February, but debt servicing costs continue to crowd out other critical areas for spending.

The South African economy's recovery has been quicker than expected, with output to return to pre-pandemic levels by 2022, according to National Treasury. This is a year earlier than previously estimated in the February budget.

Finance Minister Enoch Godongwana on Thursday tabled the Medium-Term Budget Policy Statement (MTBPS) in Parliament.

The MTBPS outlines government's spending plans over a three-year period, and also includes projections for economic growth and provides an update on the state of public finances.

Treasury has revised the growth outlook for 2021 from 3.3% to 5.1%. But growth will drop to 1.8% in 2022 and settle at 1.7% by 2024. The MTBPS document highlighted that the growth levels in the next three years are too low to meet the country's development needs.

Growth has largely been helped by the commodity prices boom on the back of greater global demand. "Higher commodity prices have temporarily increased economic growth and tax revenue," Godongwana said in an introductory note of the MTBPS.

"This windfall is a welcome once-off boost, but revenue remains well below pre-pandemic projections," he added. Treasury projects revenue of R1.485 trillion for 2021/22. The 2019 MTBPS projected revenue collections of R1.55 trillion for the 2021/22 financial year.

The finance minister is sticking to his predecessor's fiscal consolidation path - and indicated the "temporary" tax windfall will be used to reduce the borrowing requirement. Some of it will also be partly used to support people and businesses affected by the Covid-19 pandemic and the civil unrest in July 2021.

Godongwana noted that improved economic output has failed to lift investment and employment meaningfully. Unemployment is at a record 34.4%. These issues are largely linked to structural challenges.

"Businesses remain constrained by longstanding obstacles like electricity shortages, inefficient and high-cost rail freight, inadequate broadband spectrum and red tape," Godongwana said. The progress in implementing reforms has also been slow. However, he reiterated intentions to accelerate structural reforms to promote growth, while keeping to the fiscal consolidation course to stabilise debt levels.

The fiscal consolidation path is necessary to reduce the public debt burden - projected to be R4.08 trillion for 2021/22 - as well as to restore investor confidence, among other things. Global borrowing conditions are becoming less favourable - which means issuing debt will become more expensive.  Rising debt service costs crowd out other critical areas of spending - totalling more than R1 trillion over the medium term.

"Over the next three years, government will pay more for interest on its debt - an average of 21 cents of every rand collected in revenue per year," said Godongwana. This is money diverted from health, social development, peace and security.

"Stabilising the debt burden is therefore essential for fiscal sustainability and freeing up the resources needed to support economic and social priorities," he added.

The temporary tax windfall has allowed Treasury to revise its debt-to-GDP ratio to 69.9%, from 74.1% projected in February. But this ratio will grow to 77.8% by 2024/25 - and this is also the year that Treasury expects the fiscal consolidation period to be over. Debt to GDP will peak at 78.1% in 2025/26 before declining.

Treasury is aiming to achieve a primary budget surplus (with revenue higher than non-interest spending) from 2024/25, a first since 2008/09. Treasury projects the budget deficit to be 7.8% of GDP in 2021/22, and then narrow to 4.9% by 2024/25.

Acting head of the budget office Edgar Sishi noted that the short-term fiscal outlook has improved, largely linked to revenue performance. However, government departments have also been playing their part in spending discipline - this with exceptions due to the wage bill and other health responses amid the pandemic, he explained.

In the current year expenditure is expected to breach the ceiling of R1.51 trillion, by R56 billion - due to Covid-19 lockdowns, civil unrest and wage bill adjustments, the MTBPS document read. But revenue improvements since the February budget allowed for an increase in the spending ceiling over the medium term.  

The ceiling for 2022/23 was raised by R30.5 billion to R1.57 trillion. In 2023/24, the expenditure ceiling was raised by R28.1 billion to R1.55 trillion.

Major fiscal risks, however, will emanate from state-owned enterprises, he highlighted. Treasury has not made additional allocations to these entities for the next three years.

In the MTBPS document, Treasury indicated that over time government intends to shift spend from consumption and crisis response towards growth-enhancing investment. Government has also been assessing the effectiveness of large spending programmes, to ensure greater value for public money.

"Public spending can build the foundation, but cannot substitute for private-sector investment and job creation. In this regard, structural reforms will help boost confidence and investment in the economy," Godongwana said.

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