The standout feature of the February 2021 budget was the National Treasury’s resolve in sticking to its fiscal consolidation path and using the bulk of a R100bn revenue windfall to consolidate SA’s debt.
This cheered the markets, especially as more than half of the R265bn in planned expenditure reduction was to be carved from the bloated wage bill, because it denoted a new level of seriousness by the government in getting to grips with SA’s fiscal challenges.
Since then, two big new claims on the budget have materialised: the final public sector wage settlement, which cost the state R20bn more than expected, and a R36bn economic support package the president was forced to announce in the aftermath of the July unrest.
Fortuitously, the expected commodity-related revenue windfall remains intact, despite most commodity prices coming off their recent peaks. Some economists forecast that the amount could even be as large as R170bn.
This should take care of the overexpenditure racked up this year while still allowing SA to post much better deficit and debt numbers than expected in February.
Together with long overdue technical adjustments to the national accounts — which showed that nominal GDP was 11% larger than previously thought — this has substantially improved SA’s fiscal picture, at least in the near term.
Absa economist Peter Worthington foresees that the 2021/2022 consolidated budget deficit could now come in at 5.6%, compared with the 9.3% the Treasury was budgeting for in February.
The expectation then was that thanks to the pandemic the debt ratio would explode to 81.9% of GDP by the end of this fiscal year from about 60% in 2019/2020. Now it will likely come in at about 71%.
In short, SA has a little wiggle room in the medium-term budget, whereas before it was firmly against the ropes.
The upshot is that when new finance minister Enoch Godongwana stands up to deliver his maiden medium-term budget policy statement (MTBPS) on November 11, he is unlikely to repeat the warnings of his predecessor, Tito Mboweni, that the country is headed towards a debt crisis. At the same time, he won’t want to create the impression that SA is swimming in cash, or that the Treasury’s commitment to fiscal consolidation is wavering.
In fact, with many ANC politicians itching to institute a permanent R100bn-R200bn basic income grant on the back of what is likely only a temporary commodity boom, the Treasury may deliberately dial down its revenue and growth forecasts.
This is certainly the expectation of Peter Attard Montalto of Intellidex. After all, as he points out, the International Monetary Fund expects growth in SA to average just 1.3% between 2023 and 2026, while the Reserve Bank expects long-run growth to remain flat in per capita terms.
By contrast, the Treasury has been flirting with numbers above 2% in its long-run debt forecasts.
However, the danger for Godongwana is that if his forecasts appear too conservative, investors may interpret this to mean the Treasury doubts the government’s ability to deliver economic reforms. This would be bad for confidence.
Rand Merchant Bank chief economist Ettienne le Roux will be watching closely to see whether the Treasury, which prior to the pandemic repeatedly lowered its longer-term growth estimates, will shift to making upwards adjustments under Godongwana’s stewardship.
Based purely on Godongwana’s public comments, Le Roux concludes that the new minister recognises the importance of structural reforms in sectors such as energy, telecommunications and logistics, and that he supports the Operation Vulindlela implementation initiative of the presidency and the Treasury to drive the reform agenda.
"By giving the nod to this programme he effectively has given the all-clear to policy continuity and certainty," says Le Roux. "Investors have been comforted by this."
Investors have also taken comfort from the minister’s stated preference for job creation programmes over further sharp increases in social spending to help deal with SA’s social ills.
"Reading between the lines, he seemingly, therefore, acknowledges there’s little, if any, scope left for the Treasury to increase social spending further, especially when pro-growth government fixed investment as a share of the budget has been falling," says Le Roux.
On the other hand, even though SA’s long-term fiscal outlook is not yet sustainable, it has improved markedly. Sanlam Investments economist Arthur Kamp believes SA should use the reprieve to at least maintain social grant expenditure at pre-pandemic levels. "We know fiscal consolidation is required, but the burden of the adjustment should not fall on grant recipients in an environment where it is more difficult than ever to find a job," he argues.
Certainly, there’s a growing expectation that the special Covid grant for unemployed adults will be retained indefinitely and possibly also increased from the current R350 a month. The grant was reinstated following July’s unrest, but is set to expire in March 2022.
Kamp recommends that the current level of grant spending keep pace with inflation — something not allowed for in February’s fiscal consolidation plan. In addition, he thinks the government should retain the special Covid grant.
To do this would require additional spending of about 0.5% of GDP (R32bn in 2021 prices) in the 2022 and 2023 fiscal years relative to the February 2021 budget baseline. However, Kamp estimates that this would still leave overall social grant spending in the region of 3.5% of (revised) GDP, in line with SA’s pre-pandemic medium-term projections.
The finer detail aside, the bigger question that will be answered at the MTBPS is whether Godongwana will be as fiscally conservative as Mboweni and stick to the extremely tight public spending envelope set out in the February 2021 budget.
The answer is probably "no", simply because such extremism is no longer as necessary.
The intended path was for noninterest spending to decrease by an unprecedented 5.2% after inflation (or by 1.1% in nominal terms) over the medium term. Wits University associate professor Michael Sachs says this would have made it "the largest and most sustained [fiscal consolidation] in SA’s history".
But if Godongwana eases the pace of consolidation slightly in response to SA’s improved debt metrics, the next question will be whether this is being done to relax public sector wage restraint or to alleviate rising poverty and joblessness.
Using up some fiscal space due to the latter would likely be forgiven by the markets — provided SA doesn’t accede to huge, permanent new welfare entitlements before evidence of stronger growth has emerged.
This is why it is important that the Treasury pronounces on the affordability of a basic income grant. So far it has not shared the results of its own modelling (if it has done any), saying a political decision has yet to be taken by the cabinet on this issue.
Even so, economists are growing frustrated that the Treasury hasn’t spelt out the fiscal implications in detail. It’s possible that the MTBPS will do so, but it’s more likely to defer discussion to the February 2022 budget.
Other thorny issues that may be dodged include the design of a debt solution for Eskom and the question of whether state-owned enterprises will again receive fresh bailouts.
[Godongwana] effectively has given the all-clear to policy continuity and certainty. Investors have been comforted by this
— Ettienne le Roux
Also on the back burner is whether the finance minister’s eagerness to reduce the cost of doing business in SA will extend to him delivering on Mboweni’s pledge to cut the corporate tax rate from 28% to 27% come April 2022.
Sachs has argued against this being done at present, as corporates are enjoying a commodity windfall while the poor are being expected to carry a disproportionate burden of the fiscal adjustment through steep cuts in state spending.
He has a point, so perhaps the tax cut will be deferred for a year or two. But, if so, it would be a mistake to infer that the Treasury has done a U-turn on how best to manage the economy. It shows no signs of changing its view that the best way to support the economic recovery and avoid a debt crisis is not by increasing state spending through higher taxation and borrowing but by fiscal consolidation that stabilises debt, complemented by bold structural reforms.
But that doesn’t mean, given SA’s dire social needs, that the Treasury can refuse to accede to new spending commitments agreed to by the rest of government.
Given the intense spending pressures bubbling up from society, economists fear the deficit could widen again from fiscal 2022 or at best remain sticky at high levels. If so, the debt ratio will likely continue to grind higher over the long term unless the growth rate can be lifted sustainably to 3% or more.
In short, Godongwana must tread an extremely fine line between satisfying legitimate demands for greater social support and maintaining fiscal discipline, while arguing forcefully for faster structural reforms. It’s going to be a budget in which he is expected to be all things to all people.
Let’s hope the affable new minister doesn’t try to pretend that’s possible.
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