- Finance Minister Tito Mboweni’s 24 February budget benefits from better-than-expected revenue shortfalls but aims to hold the line on fiscal consolidation over the medium term.
- Above all, his plan to stabilize South Africa’s public finances will stand or fall by the government’s ability to implement its bold public-sector wage freeze.
- Mboweni promised that support for state-owned enterprises would occur only through budget reprioritization, but the Budget Review report suggests how hard it may continue to be to hold the line on injections.
Better-than-expected revenue forecasts have allowed the National Treasury to present slightly improved metrics relative to October’s disastrous Medium-Term Budget Policy Statement (MTBPS). While South Africa’s 2020 GDP contraction is expected to come in at -7.2%, the consolidated budget deficit is now projected at 14% of GDP in 2020/21, decreasing to 6.3% of GDP by 2023/24.
The less-than-expected revenue shortfall has also helped the Treasury to defer significant tax increases – other than on the usual suspects of sin taxes including alcohol and tobacco, and the fuel levy – and reduce the corporate income tax rate slightly, to 27%, from April 2022.
On the back of improved assumptions about the global and domestic outlook, as well as budget consolidation measures, Mboweni now hopes to stabilize public debt at 88.9% of GDP in 2025/26, versus 95% projected in the MTBPS. However, Mboweni’s proverbial “mouth of the hippo” of debt remains wide open, and a sustained economic recovery is far from assured given downside risks that include successive Covid-19 waves and fresh lockdowns; delays in the vaccine rollout and vaccine efficacy regarding new strains; electricity shortages; and the pace of reforms, which remains slow notwithstanding Mboweni’s claims to the contrary.
Wage bill challenge
Above all, the execution of the budget will stand or fall by Mboweni’s plan for a nominal freeze on public-sector wages, which accounted for 47% of government revenue in 2020/21. The Budget Review assumes a 1.2% annual rise in the consolidated wage bill over three years, to accommodate increases to medical aid and pension contributions.
As discussed previously, this plan hinges on two factors: first, that the government will not be obliged to pay outstanding above-inflation wage increases (estimated to amount to ZAR 37bn) for 2020/21 (unions are appealing the matter at the Constitutional Court); secondly, the government assumes that it can hold its tough line in negotiations for a new multi-year wage agreement, which are due to start within the next couple of months. As the Treasury itself acknowledges, any departure from compensation budget ceilings “in the forthcoming wage agreement will be unaffordable and compromise debt stabilisation.” This hard line is a political gamble, especially ahead of the municipal elections, when the African National Congress (ANC) has traditionally relied on the organizing power of trade union federation COSATU. COSATU will oppose the freeze, which may increase strike risks and perhaps calls for Mboweni’s head in the months ahead, though union leaders will hardly be surprised by today’s austerity message.
Vaccine and social spending
Mboweni did budget for South Africa’s vaccine roll-out (partly via the contingency fund), which will be considered a crucial first step towards any economic recovery. On social grants, Mboweni did fulfill President Cyril Ramaphosa’s State of the Nation Address (SONA) pledge to extend the ZAR 350 (USD 24) monthly Covid-19 grants by three months, while the Unemployment Insurance Fund (UIF)’s temporary employer-employee relief scheme (Ters) will also be extended to workers in industries closed as a result of the lockdown. Nevertheless, regular social grants will increase below inflation, and the question is whether this is politically sustainable given the extent of social hardship and record unemployment.
State-owned enterprises, another major fiscal risk, received little mention in Mboweni’s speech. While Mboweni has been fighting an often lonely battle to cut state funding for ailing public entities, additional budget allocations this year show how hard it is for the Treasury to draw a firm line.
For example, Eskom will receive state support worth ZAR 31.7bn this fiscal year, yet Mboweni provided no signals regarding the long-awaited debt deal to help the utility tackle at least half of its debt burden, which has reached ZAR 488bn (USD 33bn). South African Airways (SAA) has been allocated an additional ZAR 3.5bn (USD 239mn) for its business rescue plan, despite promises in October that the ZAR 10.5bn (USD 718mn) allocated at the time would be the last bailout while the Department of Public Enterprises labors to bring a strategic equity partner on board. The defaulting Land Bank will receive ZAR 7bn (USD 478mn) over the medium-term framework, though this will come from expenditure reprioritization. Indeed, Mboweni emphasized that “[a]ny support to state-owned companies and public entities will have to be done through budget reprioritization,” but SOEs continue to represent a clear and present danger to public finances.
On balance, this budget seems to cater more to the private sector than Mboweni’s cabinet colleagues, the ANC’s labor allies, or the poor, which may bear some electoral risks ahead of the 2021 municipal elections. Mboweni will need to have had political top cover from President Cyril Ramaphosa to push the budget through cabinet. Yet the fact that the president is not particularly outspoken about his support for Mboweni’s approach means the finance minister will likely continue to absorb the blame for South Africa’s fiscal consolidation drive. It may be convenient for Ramaphosa to have his minister serve as his shock absorber, but questions about Mboweni’s clout and tenure are unlikely to go away.