- Ahead of the 24 February budget, South Africa’s near-term fiscal outlook has improved slightly relative to last October’s disastrous Medium-Term Budget Policy Statement (MTBPS).
- This is primarily thanks to exogenous factors, not because President Cyril Ramaphosa’s government has suddenly grasped the reform nettle.
- Despite short-term relief, the sustainability of the economic recovery and reform momentum will be crucial to avoiding a fiscal cliff around the mid-2020s.
Buoyed by commodity prices and global liquidity, better-than-expected revenue forecasts should allow the Treasury to present improved metrics compared with October’s devastating MTBPS. Independent economists now expect the ZAR 230bn shortfall anticipated in October to come in at least ZAR 100bn smaller. This is expected to reduce the 2020/21 main budget deficit by a couple of percentage points below the 14.6% of GDP forecast in the MTBPS. Independent forecasts now put the budget deficit slightly above 12%, which could take the gross debt-to-GDP ratio down slightly below 80%.
Additional expenditure since the MTBPS looks relatively manageable for now. The main new line item that Finance Minister Tito Mboweni has to budget for is the Covid-19 vaccine program, which is estimated at ZAR 20-24bn. He also needs to find an estimated ZAR 6bn to fulfil President Cyril Ramaphosa’s State of the Nation Address (SONA) pledge to extend the ZAR 350 monthly Covid-19 grants by three months. The Unemployment Insurance Fund (UIF)’s temporary employer-employee relief scheme (Ters) will also be extended, though only to workers in industries that were closed over the most recent lockdown.
This improved picture should ease the pressure to introduce tax increases this fiscal year, at a time when economic recovery is paramount. Even relatively modest tax increases envisaged at around ZAR 5bn could perhaps be deferred. In preparation for the budget, the Treasury seems to have contemplated tax increases, including rare and highly unpopular VAT increases. However, the improved revenue outlook will take the pressure off tough decisions around drastic hikes, which the cabinet – where consensus is not nearly as hawkish as Mboweni would like – may not have approved anyway, particularly amid the 2020 recession and ahead of municipal elections (due between August and November).
While the 2020/21 outlook could be better than once anticipated, a sustained economic recovery is far from assured, with growth expectations muted over the medium-term. Downside risks are hardly in short supply, including successive Covid-19 waves and the fresh lockdowns; delays in the vaccine rollout and vaccine efficacy regarding new strains; electricity shortages; and the slow pace of reforms. Unless growth rates rise, the government will face an uphill struggle in addressing the ballooning debt conundrums, which Mboweni hopes to stabilize around 95% of GDP by 2025.
Alongside growth, just as important will be signs that the government plans to hold the line on planned spending cuts worth ZAR 300bn and attempts to shift the composition of spending. In October, Mboweni made bold promises of a public-sector wage freeze. He will likely hold this line in the budget presentation. However, the government’s ability to implement the freeze will depend on two factors beyond the minister’s immediate control. First, the government faces trade unions’ appeal against the December Labour Appeal Court ruling that absolved the government from implementing wage increases for 2020/21, the last leg of a three-year wage agreement; the matter is now before the Constitutional Court and will have far-reaching implications for unions and collective bargaining. Secondly, talks for a fresh multi-year wage agreement may take several months to complete and will generate volatility and possibly strikes. While Wednesday’s budget could thus look decent on paper, its implementation is not assured.
One immediate question is whether a temporary improvement in the macro outlook makes Mboweni’s battle against indebtedness much harder to pursue in the face of opposition from his cabinet colleagues. Mboweni may try to avoid emphasizing short-term improvements in his budget speech lest it dent his ability to hit home the need to tackle South Africa’s debt load over the medium-term.
Another problem is that Mboweni’s tenure itself is uncertain. A cabinet reshuffle is already urgently required after the untimely death of minister in the presidency Jackson Mthembu in January, not to mention by a growing sense of incompetence in the cabinet. Although the timing of Mboweni’s departure is unclear, his reluctant, arm’s length leadership at the Treasury departure and his poor attendance record at cabinet meetings may eventually make his resignation likely. His departure would generate major headline risk if he were replaced with anyone other than a heavy hitter like South African Reserve Bank (SARB) Governor Lesetja Kganyago (which is plausible but uncertain). His replacement will be all the more crucial given recent brain drain at the Treasury and concerns that the once-mighty ministry no longer plays a leading role in policy formulation.