Some good news ahead of Mboweni’s budget – but economists warn government to tread with caution
The annual budget statement will be the main event on the economic calendar this week, and a few unexpected positive developments have made the budget preparations somewhat less tense.
In a research note published on Monday (22 February), the Bureau for Economic Research (BER) said that these developments include:
- The boom in South Africa’s export commodity prices, as well as the better-than-expected GDP recovery in the second half of 2020. This has provided an unexpected tax revenue windfall. Overall tax revenue should still decline by a concerning 10-11% (or R200 billion) in 2020/21, but this should beat the dire October estimate by up to R100 billion (2% of GDP).
- The government-friendly verdict by the Labour Appeal Court in December 2020. This meant that Treasury could proceed with reneging on the 2020 salary adjustment that was part of the 2018 public sector wage agreement. The estimated cost saving is R37 billion, or 0.8% of GDP.
- The cost of government borrowing has declined since October. This could be short-lived should South Africa yields continue to rise amid the global reflation trade.
Despite these favourable developments, a very large main budget deficit of 11.5 to 13% of GDP is expected for 2020/21, said the BER.
“While this would be quite a bit better than Treasury’s projection for a 14.6% of GDP deficit in the October 2020 budget statement, it will still push overall gross government debt towards 80% of GDP.”
A further notable medium-term increase seems almost inevitable, it said.
“The sizeable 2020/21 revenue overrun does suggest that the procurement of vaccines and the three-month extension of the R350/month special relief of distress grant can be absorbed without the need for tax hikes on top of the R5 billion already pencilled in for 2021/22 and/or further expenditure reprioritisation.”
It could also enable Treasury to cut down on their weekly bond issuance, which should be positively received by the bond market, the BER said.
“Still, against a backdrop where future nominal GDP growth and the associated government tax revenue is highly uncertain, additional expenditure outlays of roughly R20 billion – say R15 billion for vaccines and R6 billion for the grant extension – highlight South Africa’s limited fiscal space.”
The group said that there remains little room for fiscal complacency or slippage on the aggressive expenditure-based fiscal consolidation drive outlined in October 2020.
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