South African government moves to stabilise debt as budget deficit doubles

Government’s fiscal strategy over the next three years will be to narrow the deficit and stabilise the debt-to-GDP ratio, the National Treasury said on Wednesday (24 February).

“Since the 2020 Budget Review, the budget deficit has doubled, and the in-year revenue shortfall is estimated at R213.2 billion.

“These changes reflect the impact of the Covid-19 pandemic, as well as government’s response, which prioritised relief for households and businesses, alongside a major effort to protect public health.

“The consolidated deficit in the current year – estimated at 14% of GDP – is the largest on record.”

The National Treasury said gross national debt is projected to rise from 80.3% of GDP in 2020/21 to 87.3% of GDP by 2023/24, with debt-service costs reaching R338.6 billion in that year.

“In recent months, as the economy has started to reopen, the outlook has improved somewhat. Revenue estimates are higher than projected in the 2020 Medium Term Budget Policy Statement (MTBPS), enabling government to provide immediate support for urgent public health and social needs, while improving the debt-to-GDP outlook.

“Returning the public finances to a sustainable position will require ongoing restraint in expenditure growth and implementation of structural reforms to support economic growth.

“In this context, the fiscal strategy aims to narrow the deficit and stabilise the debt-to-GDP ratio, primarily by controlling non-interest expenditure growth.”

The National Treasury also said that it will provide continued support to the economy and public health services in the short term, without adding to long-term spending pressures; and, improve the composition of spending, by reducing growth in compensation while protecting capital investment.

“Given the continuing pandemic, the fiscal framework provides short-term support to low-income households and funding for the health policy response.

“Changes since the 2020 MTBPS include three-month extension of the special COVID-19 social relief of distress grant and the Unemployment Insurance Fund’s Temporary Employer/Employee Relief Scheme, and funding for the public employment initiative and for provincial hospitals in 2021/22.

“Up to R10.3 billion is provided for vaccine rollout for the current year and over the next two years.

“Given uncertainty around vaccination campaign costs, the contingency reserve has been increased from R5 billion to R12 billion in 2021/22. These interventions do not add to longer-term expenditure.”

The National Treasury said the consolidated deficit is projected to narrow from 14% of GDP in 2020/21 to 6.3% of GDP by 2023/24.

“Gross debt-to-GDP is now projected to stabilise at 88.9% of GDP in 2025/26.”

Wage bill

A bulk of National Treasury’s fiscal consolidation measures will come from the public service wage bill, the department said on Wednesday.

This comes as government provided one of the largest fiscal responses to the Covid-19 pandemic among developing countries, resulting in consolidated government spending reaching a record 41.7% of GDP, compared with 29.6% during the economic meltdown in 2008/09.

“Narrowing the budget deficit and stabilising the debt-to-GDP ratio requires continued restraint in expenditure growth. These efforts remain on course,” the National Treasury said in documents ahead of the tabling of the Budget in Parliament.

“Compared with the 2020 Budget, main budget non-interest expenditure will be reduced by R264.9 billion, or 4.6% of GDP, over the MTEF period. Most of these adjustments are to the wage bill. Excluding compensation reductions, consolidated non-interest expenditure grows by an annual average of 0.4% in real terms.”

The National Treasury said public service compensation absorbed 41% of government revenues in 2019/20 and 47% of revenue in 2020/21.

“Allowing the wage bill to continue rising in line with recent trends is not sustainable. It would require a substantial reduction in funding for capital investment, and critical public goods and services.”

In December 2020, following government’s decision to not implement a wage increase in 2020/21, the Labour Appeal Court reaffirmed Treasury’s constitutional role in safeguarding the public finances.

“In this regard, the approach to future wage negotiations will align with the fiscal position and prevailing economic conditions. The 2021 Budget proposes a significant moderation in spending on the consolidated wage bill, which grows by an average of 1.2% over the medium term,” said the department.

Treasury said tax revenue estimates for 2020/21 are R213.2 billion below the 2020 Budget estimate, but R99.6 billion above the 2020 MTBPS estimate.

Revenue growth is expected to slow over the medium term.

“The fiscal framework reduces growth in the wage bill and the share of spending on wages, while sustaining real spending increases on capital payments, specifically for buildings and other fixed structures.

“The consolidated budget deficit, which reaches 14% of GDP in 2020/21, narrows to 6.3% by 2023/24.

“Government is projected to achieve a primary surplus in 2024/25 – meaning that total revenue will exceed non-interest expenditure – and stabilise the debt ratio at 88.9% of GDP in the following year.”

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