By Annabel Bishop
THE 2022 BUDGET Review saw a significant improvement in the government’s debt-to-gross domestic product (GDP) projections and fiscal deficits. In the medium term, gross debt is projected to now stabilise at 75.1 percent of GDP in 2024/25 (previously the projection peaked at 78.1 percent in 2025/26), placing South Africa on a firmer footing to avoid a downgrade from ratings agency Moody’s given its negative outlook, which should now become more stable.
The borrowing requirement has been reduced by R135.8 billion in 2021/22; R131.5bn in 2021/22 and 2022/23 combined.
Fiscal consolidation has clearly been deepened and the revenue overrun is being used to shore-up state finances. Also as a consequence of the R182bn revenue overrun from the 2021 Budget estimate for this fiscal year, and a R62bn overrun from the 2021 Medium-Term Budget Policy Statement (MTBPS) estimate for 2021/22’s revenue, the estimated Budget deficit has dropped sharply to -5.7 percent year on year (y/y) for this year (from the MTBPS’s -7.8 percent of GDP), but
is still substantially wider than the -3 percent of GDP limit for recognised fiscal health (although preferably below this).
A primary surplus is envisioned by 2024/25. Finance Minister Enoch Godongwana has shown fiscal gains with the core message being that the government is “on course to close key fiscal imbalances and restore the health of public finances”.
With debt still set to escalate, to R5.4 trillion (from R4.8 trillion this year), gross debt has not yet peaked as a percent of GDP and as such does not signify credit rating upgrades, but not downgrades either as the debt ratio returns to the current position by 2029/30 without slipping into B+ territory.
The Budget deficit for 2022/23 is still forecast at -6 percent of GDP as it was in the MTBPS, but drops to -4.8 percent of GDP for 2023/24 (previously -5.3 percent in the MTBPS), and -4.2 percent in 2024/25 (MTBPS -4.8 percent). Debt ratio projections are lower too from 2021/22’s 69.5 percent (2021’s MTBPS projected 69.9 percent) and for 2022/23 to 2024/25 at 72.8 percent, 74.4 percent and 75.1 percent of GDP (MTBPS projections of 74.7 percent, 76.8 percent and 77.8 percent of GDP).
South Africa has benefited temporarily from the commodity boom, but longer term will find fiscal consolidation without a dependable higher state revenue stream more difficult. It would instead require a move away from accelerating current expenditure, and the minister spoke against permanent social welfare increases, pressure from the public services wage bill and further bailouts for state-owned entities.
Substantially higher revenue collections have also been the work of improved efficiencies at the SA Revenue Service (Sars), countering criminal and illicit activity to collect taxes due which have had particular leakage though the system.
The rebuilding of Sars includes a multiyear modernisation programme, while higher revenue collections have been recorded from personal income and value-added tax, as well as other sectors and other tax instruments.
As expected, the minister highlighted that the economy is too weak for higher taxes, but made good on the promise to cut the corporate income tax rate to 27 percent from 28 percent.
But this on its own will not stimulate economic growth and employment in the private sector without a gamut of structural reforms repairing the necessary fundamentals for the South African economy, including sufficient electricity and water supply, a sharply reduced regulatory burden and increased ease of doing business, and rail and port operations.
The government did lift its GDP forecast to 2.1 percent y/y from 1.8 percent y/y for 2022, as the commodity boom and global recovery has aided immediate growth prospects, but left 2023 and 2024 unchanged at 1.6 percent y/y and 1.7 percent y/y respectively, appearing to evince little expectation of major growth impact from structural reform implementation, the government outlined in the Economic Reconstruction and Recovery Plan.
Our growth forecasts in comparison remain above 2 percent y/y over the 2023 to 2026 period and reach 2.5 percent y/y by 2024, while close to 3 percent y/y by 2026. But the minister highlighted that “we do not aspire to be a below 2 percent growth economy. We are capable of so much more”.
The 2022 Budget Speech showed that we are refining proposals for an expanded reform agenda − to shift our economy towards a higher growth trajectory. This will likely tie in with the social compact for economic growth announced at the State of the Nation Address and planned for later this year.
Annabel Bishop is the chief economist at Investec.
*The views expressed here are not necessarily those of IOL or or title sites.
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