The government has started a process of gradually reopening the South African economy.
- South Africa’s economy has benefited from a surge in commodity prices over the past year, but the resulting surge in GDP growth and tax revenues is temporary, according to the National Treasury.
- The Treasury revised the GDP growth outlook for 2021 from 3.3% projected in February to 5.1%, but stressed that it was imperative to implement structural reforms.
- The gross debt-to-GDP ratio was also revised to 69.9% from 74.1% expected in February, but debt servicing costs continue to crowd out other critical areas of spending.
The recovery of the South African economy has been faster than expected, with production returning to pre-pandemic levels by 2022, according to the National Treasury. This is a year ahead of schedule in the February budget.
Finance Minister Enoch Godongwana tabled the Medium-Term Fiscal Policy Statement (MTBPS) in Parliament on Thursday.
The MTBPS describes the government’s spending plans over a three-year period, also includes economic growth projections, and provides an update on the state of public finances.
The Treasury revised the growth outlook for 2021 from 3.3% to 5.1%. But growth will drop to 1.8% in 2022 and settle to 1.7% by 2024. The MTBPS document pointed out that growth levels over the next three years are too low to meet development needs. from the country.
Growth was largely aided by soaring commodity prices amid increased global demand. âRising commodity prices temporarily increased economic growth and tax revenues,â Godongwana said in an introductory note to MTBPS.
“This windfall is a welcome one-off boost, but revenues remain well below pre-pandemic projections,” he added. The Treasury forecasts revenue of R 1,485 trillion for 2021/22. The 2019 MTBPS forecasted revenue of R 1.55 trillion for the 2021/22 fiscal year.
The finance minister is sticking to the fiscal consolidation path of his predecessor – and has indicated that the “temporary” fiscal windfall will be used to reduce the need for borrowing. Some will also be partly used to support people and businesses affected by the Covid-19 pandemic and civil unrest of July 2021.
Godongwana noted that improving economic output has failed to boost investment and employment significantly. The unemployment rate hits a record 34.4%. These issues are largely linked to structural challenges.
âBusinesses remain constrained by long-standing obstacles such as power shortages, inefficient and expensive rail freight, inadequate broadband spectrum and bureaucracy,â Godongwana said. Progress in implementing reforms has also been slow. However, he reiterated its intention to accelerate structural reforms to promote growth, while maintaining the course of fiscal consolidation to stabilize debt levels.
The fiscal consolidation path is needed to reduce the public debt burden – projected at R 4.08 trillion for 2021/22 – as well as to restore investor confidence, among others. Global borrowing terms are becoming less favorable, which means that issuing debt will become more expensive. Rising debt servicing costs are supplanting other critical spending areas – totaling over R1 trillion in the medium term.
âOver the next three years, the government will pay more interest on its debt – an average of 21 cents of each rand collected in revenue per year,â Godongwana said. It is money diverted from health, social development, peace and security.
âStabilizing the debt burden is therefore essential for fiscal sustainability and freeing up the resources needed to support economic and social priorities,â he added.
The temporary fiscal windfall allowed the Treasury to revise its debt-to-GDP ratio to 69.9%, against 74.1% expected in February. But that ratio will rise to 77.8% by 2024/25 – and this is also the year the Treasury expects the period of fiscal consolidation to be over. The debt-to-GDP ratio will peak at 78.1% in 2025/26 before falling.
The Treasury aims to generate a primary budget surplus (with revenue exceeding non-interest expenditure) from 2024/25, a first since 2008/09. The Treasury projects that the budget deficit will be 7.8% of GDP in 2021/22, then shrink to 4.9% by 2024/25.
Acting head of the budget office, Edgar Sishi, noted that the short-term fiscal outlook has improved, largely linked to revenue performance. However, government departments have also played their part in disciplining spending – this with exceptions due to the wage bill and other health responses amid the pandemic, he explained.
In the current year, spending is expected to exceed the 1.51 trillion rand, 56 billion rand cap – due to Covid-19 lockdowns, civil unrest and wage bill adjustments, says the MTBPS document. But the improvement in revenues since the February budget has allowed for an increase in the spending ceiling over the medium term.
The cap for 2022/23 has been raised from R 30.5 billion to R 1.5 trillion. In 2023/24, the spending limit was raised from R 28.1 billion to R 1.555 billion.
However, major fiscal risks will emanate from SOEs, he said. The Treasury has not made any additional allocations to these entities for the next three years.
In the MTBPS document, the Treasury indicated that over time, the government intends to shift spending from consumer and crisis response to growth-promoting investments. The government has also assessed the effectiveness of major spending programs, in order to ensure better value for money.
âPublic spending can lay the groundwork, but it cannot substitute for private sector investment and job creation. In this regard, structural reforms will help build confidence and investment in the economy, âGodongwana said.