Financial markets were somewhat sceptical of MTBPS - PwC
DURBAN - Finance Minister Tito Mboweni presented his third Medium-Term Budget Policy Statement (MTBPS) on October 28.
It was his third budget speech for the lockdown-hit year following the regular February address and a supplementary budget released in June.
Departing somewhat from the usual three-year outlook, the minister tabled a five-year fiscal consolidation pathway “that promotes economic growth while bringing debt under control. Financial markets were somewhat sceptical: the rand traded at R16.36/$ ahead of the MTBPS speech, sliding to R16.44/$ an hour later – the worst level in a week.
A deeper economic recession than previously expected
Since the June supplementary budget, Statistics South Africa (Stats SA) had reported that the economy contracted by 17.1 percent y-o-y during the second quarter.
The National Treasury now expects the South Africa economy to contract by 7.8 percent in 2020 compared to an estimate of 7.2 percent noted in June.
PwC’s scenarios currently range from 7.8 percent to 12.0 percent, with a baseline recession forecast of 9.3 percent.
Irrespective of the eventual number, the economic recession will be deep – probably the worst in almost a century – and potentially deeper than what the National Treasury is planning for at present.
Of course, the National Treasury’s growth projections include a boost from the recently announced Economic Reconstruction and Recovery Plan (ERRP).
As with previous plans, strategies and agendas, the challenge here is in the implementation of the ERRP. This requires two key factors: political buy-in from all spheres of government as well as the human capacity to physically implement changes.
The finance minister acknowledged that previous reform processes have been hamstrung by a lack of agreement at the top level of government over proposed reforms, a failure to prioritise reforms that have been agreed on, and lack of capacity in government.
Operation Vulindlela – a delivery unit structured along international successes and housed in the Presidency – will have a full-time technical team responsible for implementation.
Revenue collection under greater pressure
A faster growing economy translates into higher tax revenues for the state. While tax receipts have improved from the weak levels seen at the start of the fiscal year (coinciding with the strictest lockdown regulations), tax collections remain below last year’s level.
Some of the factors contributing to this include:
1) a decline in compensation resulting in lower personal income tax collection;
2) weaker imports reducing customs collection;
3) a sharp reduction in consumption causing lower VAT receipts; and
4) a longer-than-expected tobacco ban cutting into excise duty collection.
The National Treasury expects fiscal revenue of R1.1 trillion in the current financial year, down R313 billion (8.7 percent) from the number released in June due to a weakened economic outlook.
Authorities expect an improvement in tax receipts over the medium term as the economy returns to a possible growth trajectory.
The MTBPS also plans for tax increases worth a cumulative R40 billion over the next four years. The first round of tax increases will likely be announced in February 2021.
Interestingly, the MTBPS also acknowledged that recent tax increases “have generated less revenue than expected, and evidence suggests that tax increases can have large negative effects on GDP growth”.
Expenditure not yet under a zero-based budget system
With a precarious revenue situation, the finance minister had to work much harder on the expenditure side of the budget to get his ducks in a row.
Consolidated budget spending is now planned to grow by a rate lower than (an already low) inflation rate. However, the controversial topic of reducing the public sector wage bill has seen no definitive resolution yet – negotiations are ongoing so this below-inflation plan could still change.
Furthermore, the minister allocated an additional R10.5 billion to South African Airways (SAA) to finance its business rescue plan. The money for this was sourced from reduced expenditure across national government departments and other public entities.
Compared to the June budget, non-interest spending is reduced by R60 billion in 2021/22, R90 billion in 2022/23 and R150 billion in 2023/24.
“Over the next three years,” warned the minister, government departments “will have to adjust spending priorities and programmes to take into account the revised baseline allocations.”
The National Treasury is obviously planning to use zero-based budgeting tools to achieve this. The strategy will be piloted in the Department of Public Enterprises and the National Treasury from next year, with all departments slated to be managed under this system by 2023.
An even wider budget deficit for 2020/21
The weaker economic and revenue outlook, combined with limited reductions in expenditure, has resulted in a worsening of the fiscal deficit.
National Treasury now expects a fiscal shortfall equal to 15.7 percent of GDP this year – this is larger than economists expected and also bigger than the 14.6 percent reading announced in June. The gap is forecast to narrow to a still-substantial 10.1 percent of GDP in the 2021/22 financial year.
Despite this massive gap between income and expenditure, the MTBPS sets out ambitious consolidation targets to achieve a primary surplus by 2025/26.
This will only be possible if substantial reductions can be made in the wage bill – currently accounting for about a third of state spending – and more money is spent on infrastructure.
Combined with a weak economy, the public sector wage bill remains the largest stumbling block to narrowing the fiscal deficit and slowing the rate at which public debt increases.
Public debt set for a (higher) peak by 2025
Minister Mboweni warned Parliament that South Africa must be careful to avoid the fate of countries like Argentina and Ecuador who defaulted on debt payments during 2020.
The revised fiscal framework plans for public debt to stabilise at 95.3 percent of GDP by 2025/26.
This is about ten percentage points higher than the level envisaged during June in his “active scenario” for debt management. It is however much better than the do-nothing “passive scenario” would have resulted in. So, on that front at least, the MTBPS is sticking to previous promises to address the debt issues over time.
However, small adjustments in the short term to income, expenditure and deficit numbers could have a big impact on debt planning in the long term.
By the time the 20201/22 fiscal budget is released in February next year, the debt trajectory could again be adjusted. The biggest risks here are that the economy does not recover sufficiently in the next five months and that the public wage bill negotiations fail to have a fiscally workable outcome.
Dr Christie Viljoen is a PwC Economist
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