Finance minister Enoch Godongwana tabled his maiden medium-term budget policy statement (MTBPS) on Thursday (11 November), reporting better than expected finances for South Africa – but against the bleak reality that the country has little room to manoeuvre in the budget.
According to Godongwana, global markets are recovering from the Covid-19 pandemic, but this is more prominent in developed nations – which project a return to normal in 2022 – than in emerging markets.
On a positive note, however, the global economic recovery has boosted demand for commodities, which has given South Africa more to work with, in the budget.
Real GDP is forecast to grow by 5.1% in 2021. Output is expected to return to pre-pandemic levels in 2022, a year earlier than estimated in February. This is largely the result of global demand, higher commodity prices and the easing of Covid-19 lockdown restrictions, the minister said.
“The South African economy grew faster than expected in the first half of 2021, but this momentum is expected to wane following public violence in July, port and rail disruptions, and the third wave of Covid-19 infections,” he said.
“Household consumption has improved but has not fully recovered from the pandemic. Inflation is contained within the target band, despite upward pressure from food and energy prices. Gross fixed-capital investment remains well below pre-pandemic levels. The labour market is weak, with unemployment at 34.4%.”
The finance minister said that the government is still committed to reducing the budget deficit and stabilising the debt-to-GDP ratio – and, barring major new shocks or unbudgeted spending commitments, staying the course will lead to a primary fiscal surplus in 2024/25.
“Over the next three years, spending will remain restrained. To avoid a widening of the budget deficit, changes to spending will be funded through improved revenue performance or through reprioritisation and reviewing existing programmes.”
South Africa’s fiscal position was already weak prior to the economic crisis in 2020. While surging commodity prices have improved the in-year revenue outlook, these temporary benefits result in declining surpluses over the medium term.
Notably, revised revenue projections fall short of pre-Covid-19 expectations by R284.7 billion until 2022/23, Treasury said.
However, the additional revenue has allowed Treasury to increase spending in certain areas:
- R3 billion is being set aside for contingency spending related to vaccines;
- R11 billion is being set aside for SASRIA to cover damages done during the July riots;
- A fiscal package of R37.9 billion has been provisioned 2021/22, using excess funds from the commodities boost;
- An additional provisional allocation of R20.5 billion in 2022/23 for wage bill adjustments;
- Higher estimated spending by the National Skills Fund and sector education and training authorities of R1.4 billion in 2022/23 and R1.6 billion in 2023/24.
Other key aspects of the budget are outlined below:
South Africa’s rising debt level remains an issue, with Treasury noting that debt-service costs are the fastest-growing spending item.
Rising debt-service costs, estimated at R1 trillion over the Medium Term Expenditure Framework is crowding out spending on service delivery functions, highlighting the impact of South Africa’s rising debt stock on basic services.
“We spent more than we were receiving in tax revenues on a consistent basis. This, together with the composition of spending, did not meaningfully increase growth. Instead of getting higher growth from fiscal expansion, our debt continued to rise,” Godongwana said.
“The R4 trillion in debt that we now owe is incurring debt service costs that will become the largest portion of spending, compared to individual functions, from next year.”
Treasury is sticking to its guns on the national wage bill freeze, which is eating up 35% of the budget.
The 2021 wage agreement provides for a pensionable increase of 1.5%, as provided for in the 2021 Budget. It includes a once-off non-pensionable cash gratuity of R1,000 after-tax per person per month, which was not budgeted for.
“This gratuity is expected to cost the government R20.5 billion in the current year, with a preliminary carry through of R20.5 billion in 2022/23 if no new agreement is reached,” it said.
“In 2021/22, the gratuity will be largely funded by additional revenue, and will require shifting funds from the Infrastructure Fund, with a provisional allocation of R20.5 billion for 2022/23 included in the fiscal framework.”
Uncertainty still lingers over the last leg of the 2018 wage bill, with legal processes still underway. If it becomes necessary to implement the final leg of the agreement retroactively, additional measures would be required, Treasury said.
“These could include revenue measures, increased borrowing and active steps to reduce the size of the public service.”
The fiscal framework does not include any additional support to state-owned companies, but Treasury noted that the poor financial condition and operational performance of several of these companies remains a large contingent risk. Several entities may request further bailouts, it said.
The review of SOEs by Treasury paints a bleak picture for the companies:
- Denel is experiencing difficulties in meeting its obligations and is negotiating with stakeholders on a way forward. The government provided recapitalisations of R1.8 billion in 2019/20 and R576 million in 2020/21, and extended a R5.9 billion guaranteed debt facility to Denel. Several repayment obligations have fallen due this year. The government has allocated R2.9 billion in 2021/22 to settle these repayments.
- Eskom continues to pose a significant risk to the public finances, as it relies on government guarantees to finance its operations. Eskom had used R281.6 billion of its R350 billion government guarantee facility by 31 March 2021, with another R7 billion committed. Equity support of R31.7 billion was provided to Eskom in 2021/22, with the last tranche of R11.7 billion disbursed on 1 July. The utility has a deadline of 31 December 2021 to complete legal separation of the transmission unit, with the other two units following in the next 12 months.
- The Road Accident Fund receives about R42 billion in fuel levies each year and pays out R40 billion in claims, but has a growing backlog of unpaid claims that reached R14.8 billion in 2020/21. The Fund’s accumulated liabilities were last estimated at over R450 billion.
- South African Airways (SAA) received R21 billion in support from the government in 2020/21. This included R10.3 billion for the settlement of government-guaranteed debt, R7.8 billion for the implementation of the business rescue, R2.7 billion for SAA’s subsidiaries, and R267 million for calls on guarantee obligations on which the airline had defaulted. The Department of Public Enterprises has identified a strategic equity partner to buy part of SAA and aims to finalise the transaction in early 2022.
Despite promises from transport minister Fikile Mbalula that the MTBPS would clear the path forward for e-tolling in Gauteng, no mention of the system was made.
Treasury noted that the South African National Roads Agency Limited (SANRAL) has incurred annual average losses of R2.5 billion since 2014/15 and has been unable to successfully issue a bond since 2017, largely due to uncertainty about the government’s position on the user-pays principle.
The government has extended a total guarantee facility of R37.9 billion to the agency, of which R28.4 billion had been used by the end of March 2021.
“While policy uncertainty remains, SANRAL is still responsible for maintaining its toll portfolio and continues to service the debt used to fund construction. To date, R5.5 billion has been collected in toll revenue against an initial projection of R20.2 billion.
“Without a policy decision that reinstates government support for the user-pays principle, SANRAL will remain a significant burden on the public finances,” it said.
Basic Income Grant
Treasury has kicked the basic income grant can down the road, saying that more research needs to be done.
“The Covid-19 pandemic increased national debate on the possibility of a universal basic income grant. Social protection programmes should ideally complement a vibrant, job-creating economy, and policy options need to consider the implications for overall economic activity,” it said.
Treasury noted that South Africa spends a higher percentage of GDP on cash grants than the vast majority of developing countries, and the social protection system accounts for 13.9% of consolidated non-interest spending in 2021/22.
“Excluding beneficiaries of the special Covid-19 social relief of distress grant, 18.3 million people receive some form of grant. In the absence of faster, job-creating growth, it is essential to maintain social protection in a sustainable way.”
Given the weakened public finances, new spending commitments can only be funded by closing existing programmes to free up revenue, or through permanent increases in revenue collection, it said.
However, it noted that new tax proposals must also be assessed against their revenue-raising potential, and wider effects on economic activity and growth.