BUDGET IN A NUTSHELL | Godongwana focused on runaway debt as repayments eat into critical services

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Finance Minister Enoch Godongwana.
Finance Minister Enoch Godongwana.
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  • On his 106th day in office, Finance Minister Enoch Godongwana tabled his first Medium-Term Budget Policy Statement.
  • He hardly veered from the fiscal consolidation path set out by his predecessor Tito Mboweni.
  • A tax windfall, and spending discipline by government departments, has helped improve the fiscal outlook in the short term.


Insofar as differences between him and his predecessor Tito Mboweni are concerned, Finance Minister Enoch Godongwana says he wears better shoes.

Godongwana made the comments at a media briefing ahead of the tabling of the Medium-Term Budget Policy Statement (MTBPS) on Thursday. This also happens to be his 106th day in office, since replacing Mboweni in August.

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.

Godongwana recalled a conversation he had with Mboweni, where they discussed their differences. "The only difference between us [is] your shoes. I wear better shoes than you," he said he told the former minister.

Godongwana stressed that when it comes to the fiscal framework, the two are "on the same page." The minister hardly veered off from the path set in the February budget and fiscal consolidation with the aim to stabilise debt - projected to be over R4 trillion this year - is the order of the day.

Here is the budget in a nutshell:

Economic outlook

Treasury has upwardly revised the GDP growth rate from 3.3% to 5.1%, and says output levels will return to pre-pandemic levels by 2022. Growth has been helped by less stringent Covid-19 restrictions, lower interest rates and higher commodity prices.

"The strength of South Africa's economic recovery will also depend on the rollout of vaccines," Godongwana told members of Parliament.

The pace of recovery will not be sustained over the next three years, with growth averaging 1.7% annually, hardly enough to meet the country's development needs.

Godongwana stressed the importance of structural reforms, some of which have not been rolled out at the pace he would have liked.

Temporary tax windfall

Another advantage of the commodity price rally was higher tax revenues - now projected to be R120.3 billion more than the February estimate.

Treasury now projects revenue collections of R1.485 trillion for the 2021/22 fiscal year. This is still below pre-pandemic projections. Revenue from 2020/21 to 2022/23 is forecast to be R284.7 billion below the 2020 budget projections, Treasury's MTBPS document read.

The improved revenue outlook is linked to better-than-expected collections in the final quarter of 2020/21, with upward revisions to the economic growth outlook and strong tax collections, specifically from corporates.

Corporate income taxes account for R75.5 billion of the higher projected revenue collections for the year.

Servicing debt

The temporary tax windfall will be partially used for reducing the budget deficit and other social relief measures in response to the pandemic and the effects of the civil unrest in July. The debt burden is projected to be R4.08 trillion for 2021/22.

Debt servicing costs crowd out other critical areas of spending - and are projected to total 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.

Revised debt ratios

The temporary tax windfall has allowed Treasury to revise its debt-to-GDP ratio to 69.9%, from 74.1% projected in February. This ratio will grow to 77.8% by 2024/25 - and then peak at 78.1% in 2025/26, before declining.

The consolidated budget deficit as a measure of GDP is projected to be 7.8% this year, before narrowing to 4.9% in 2024/25 - this is also the year government expects revenue to exceed non-interest spending. The last time this happened was in 2008/09.

Overall the fiscal outlook has improved in the short-term, not only because of revenue collection improvements. Government departments have been implementing spending disciplines, according to a Treasury official.

Expenditure ceiling

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.

Tough love for limping parastatals

Godongwana offered no new money to struggling state-owned entities, saying total debt redemptions for the parastatals will average R73.4 billion a year over the medium term.

Eskom continued to pose a significant risk to the public finances, as it continued to rely on government guarantees.

SAA already received R21 billion in support from government in 2020-21, including R10.3 billion for the settlement of government-guaranteed debt.

In the MTBPS's fiscal risk assessment, Godongwana warned that access to capital markets had become increasingly restricted for state-owned companies as a result of weak revenue growth, poor operating performance, and mounting debt-service costs. 

"Rising interest rates and increasingly unfavourable loan terms also raise the risks associated with borrowing. The Covid-19 pandemic and associated restrictions on economic activity have delayed the execution of capital investment projects, muted tariff adjustments and slowed the collection of payment from users," the risk assessment said. 

The MTBPS said the total debt redemptions for state-owned companies will average R73.4 billion a year over the medium term, with foreign debt making up 45% of the total.

Godongwana said the MTBPS made little room for new funding for state-owned entities outside of assisting them with existing debt commitment – as seen in R2.9 billion allocated to Denel after a default, because parastatals needed to start performing better. 

While no new money was offered to struggling state-owned entities in Godongwana's first medium-term budget policy statement, an exception will apply when guarantees are called by creditors - and SOEs have met the conditions in question.

Eskom debt solution

Treasury hardly touched on solutions for Eskom's debt burden of over R400 billion.

During a briefing ahead of the tabling of the MTBPS, Treasury's deputy director-general of asset and liability management Duncan Pieterse explained that Eskom has been allocated R230 billion over 10 years for debt and debt servicing costs.However, there is ongoing work between National Treasury, The Department of Public Enterprises and the Department of Mineral Resources and Energy - via a finance workstream - to address Eskom's debt and other financial challenges.

Grants

The MTBPS said too wide an extension of social grant support would not be sustainable for the underperforming South African economy and could not be considered if they undermined growth and economic activity.

It also follows unrest which erupted in July in the provinces of KwaZulu-Natal, Gauteng – and to a lesser extent Mpumalanga – which is estimated to have cost the South African economy R50 billion in GDP growth.

The MTBPS said social grant-based relief of distress would amount to R28.3 billion in the 2021/22 financial year.

"To continue mitigating food insecurity and poverty in the 2021-22 financial year, an additional R26.7 billion is allocated to the Department of Social Development to reinstate and administer the special Covid-19 social relief of distress grant for eight months from August 2021 to March 2022," the statement said.

The increase in an array of social grant supports is also at the heart of conflict between the ANC and middle class as well as affluent South Africans, as economists remain adamant that a significant expansion of social grant support cannot be achieved without taxing higher income earners.

Public service wages

The consolidated MTBPS said while the pensionable increase was provided for in the 2021 budget tabled by Mboweni in February, the non-pensionable cash gratuity was not.

The MTBPS's annexure on compensation data said between 2006-07 and 2020-21, compensation spending on the consolidated budget rose by an annual average of 9.9%, from R170 billion to R635.4 billion, while compensation spending by national and provincial departments rose by 9.8% a year, from R153 billion to R570.3 billion.

In a stark characterisation of the situation, Godongwana hinted that if the cost of honouring the public service wage agreement, including the gratuity, became too great, government would have to go as far as shifting money from the Infrastructure Fund in order to cover the costs.

He said domestic risks included the recent public service wage agreement, which breached the budget ceiling for compensation of employees by R20.5 billion, and continued deterioration in the financial position of several major state-owned companies.

Sasria and unrest funds

The allocation of R3.9 billion to Sasria is in line with the second special appropriation bill of 2021 and will be provided to Sasria through the state-owned entity financial management and governance subprogramme in the asset and liability management programme.

Godongwana signalled that a net addition of R59.4 billion to main budget non-interest spending was being proposed, consisting of R77.3 billion in spending increases.

"The 2021-22 fiscal framework includes R3 billion in the contingency reserve for additional vaccine purchases and R11 billion as a provisional allocation to Sasria for risk coverage in the wake of the outbreak of public violence in July," the MTBPS said.

Insufficient capacity for National Health Insurance

National Treasury highlighted that the National Health Insurance (NHI) Policy would require R40 billion per year in additional funding, in its first five years and possibly more over time.

Currently there is "insufficient capacity" in the health sector to work on the policy, Treasury said. The Bill itself still needs to be passed in Parliament.

Treasury does not see the NHI posing significant cost pressures in the medium term.

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