In his first major budget address since being appointed in August 2021, Finance Minister Enoch Godongwana delivered his Medium-Term Budget Policy Statement (MTBPS) to Parliament yesterday (11 November).
Lullu Krugel, chief economist at PwC Strategy& South Africa, and Dr Christie Viljoen, senior economist at PwC Strategy& South Africa unpack the announcements.
It was widely expected that the minister would have a better fiscal story to tell compared to what his predecessor told in February 2021 due to an improved economic growth outlook and better-than-expected fiscal revenues.
Improved GDP growth forecast for this year, but very conservative from 2022
Earlier this year, the National Treasury was expecting the economy to grow by 3,3% in 2021. Now, the forecast is more favourable: MTBPS projection is for 5,1% this year. While the accompanying recovery in employment has been disappointing, many industries have reported better-than-expected company revenues. For example, PwC’s Major Banks Analysis 2021 found that banks’ earnings benefited during the first half of 2021 from improved loan performance within wholesale credit portfolios, as record commodity prices supported South African corporate earnings across several key industries.
It is interesting to note that publishing an MTBPS with an upwardly revised in-year GDP growth forecast is a rarity. Over the past decade, economic growth forecasts – from government, the South African Reserve Bank (SARB), and private sector economists – have perennially been overoptimistic early in the calendar year. By the time the MTBPS is released, these projections are usually revised lower.
There are several reasons for over-optimism in recent years, including expectations that often-touted structural reforms would be implemented expediently to the benefit of economic growth. Domestic reforms continue to lag and the better-than-previously GDP views at present are largely due to external factors, specifically high international commodity prices.
It is likely that caution over historical over-optimism factored into the National Treasury forecasting real GDP growth of less than 2% per annum during 2022-2024.
In his speech, the minister noted that “some structural weaknesses such as inadequate electricity supply” will weigh on economic growth prospects. We welcome the National Treasury, via the MTBPS, taking a conservative stance on economic growth projections. In the past, over-optimistic economic growth forecasts have resulted in revenue projections above what the economy could deliver. This, in turn, resulted in greater fiscal deficits and rising public debt ratios.
Miners support a R128-billion boost in consolidated government revenue
Based on tax collections in the first half of the current fiscal year, economists were expecting an overcollection of at least R100-billion in the 2021/2022 fiscal year compared to initial budget planning. This was based on better-than-expected corporate tax payments from especially mining firms. Stats SA reported previously that mineral sales increased by 57,1% y-o-y during the first eight months of the current calendar year on the back of strong physical demand and higher international commodity prices. From pricing perspective, the London Metal Exchange (LME) index of metal prices increased by 25% in rand terms since the start of 2021.
The National Treasury now expects consolidated government revenue of R1,649-trillion in the 2021/2022 fiscal year, up R128-billion (8,4%) from the February estimate.
However, the finance minister also warned that precious metal prices have started to soften and that “revenue gains from the commodity price rally are expected to be temporary”. As a result, he noted that the country “should not make permanent spending commitments from short-term revenue” and that this is embedded in the fiscal policy framework.
Spending increases, but not for job creation and labour affairs
Around R38-billion of the R128-billion revenue bonanza was previously allocated to direct fiscal support following the damage caused by unrest in July. This includes money for an extension of the R350 Social Relief of Distress Grant. In total, half of the R128-billion in extra revenue is being spent on social protection and social security funds.
The MTBPS also makes an additional R11-billion available to the South African Special Risk Insurance Association (SASRIA) to enable them to continue settling legitimate claims from private businesses damaged during the unrest.
Most other function items received a slight boost in their budget while a small portion of the revenue bonanza will go unspent and contribute towards a R20-billion smaller fiscal deficit.
Paradoxically, one function receiving substantially less money compared to February’s planning is ‘job creation and labour affairs’. This area’s budget has been cut by R10,1-billion to R23,3-billion despite the minister saying in his speech that “the huge unemployment challenge we face as a country” is a key concern for the government.
It appears that funding for state functions promoting employment development – as of part spending on economic development – has been reduced in favour of direct job creation by the state. Minister Godongwana noted that Budget 2022 will allocate R74-billion towards public employment programmes (that is jobs directly created by the state) over the medium term.
Rebased GDP benefits fiscal deficit and public debt ratios
Returning to some other good news, the fiscal deficit is now expected to equal 7,8% of GDP this year, down from an estimate of 9,3% released in February and last year’s figure of 10%.
Most of the decline in the 2021/2022 number is due to the rebasing of GDP in August which resulted in the size of the economy being estimated at 11% larger than previously calculated.
By simple mathematics, the fiscal deficit reading is smaller due to this update in GDP calculations. The actual budget deficit will be only R20-billion smaller – at R480-billion – in 2021/2022 compared to February’s planning.
Rebased GDP, a smaller fiscal deficit this year, and plans for a narrowing of the budget shortfall over the medium term will contribute towards a slower expected increase in public debt.
The National Treasury now expects gross public debt to equal 69,9% of GDP this year (compared to 81,9% previously) and for an increase to 77,8% by 2024/2025. To be fair, this is still a very high number, and the state will be paying nearly R270-billion in interest payments during 2021/2022.