MTBPS: Less aggressive efforts to reign in expenditure
DURBAN - The Minister of Finance tabled the much-anticipated Medium Term Budget Policy Statement (MTBPS).
As elucidated here we expected one of two outcomes: either the MTBPS would be light on details and continue to emphasise the Special Adjustment Budget (SAB) fiscal consolidation targets and plans to stabilise debt over a five-year period; or the minister would present a plan that shows debt stabilising over a longer period, with more realistic forecasts consolidation targets.
Our second expectation materialised as the Minister of Finance tabled a less aggressive fiscal adjustment but with debt-to-GDP still stabilising over the next five years, albeit at a a higher level relative to the active scenario in the June SAB.
Despite the less aggressive fiscal adjustments, we think that execution risk remains elevated. For one, the expenditure cuts require further downward revisions to compensation of employees (COE) over the Medium Term Expenditure Framework, despite the ongoing wage disputes for the current fiscal year.
Further, risks to the growth outlook could weigh on revenue, resulting in higher tax revenue shortfalls and thereby a higher debt-to-GDP trajectory than outlined in the MTBPS.
As expected, National Treasury trimmed the 2020 growth projections, although less aggressively than the SARB and IMF. They now expect real GDP to contract 7.8 percent in 2020, before recovering to 3.3 percent in 2021 followed by moderating growth of 1.7 percent in 2022(SAB – 2020: -7.2 percent, 2021: 2.6 percent and 2022: 1.5 percent).
This is broadly in line with our 2020 expectations, albeit erring on the optimistic side for the outer years (we expect 3 percent and 0.5 percent for 2021 and 2022 respectively).
As shown in our preview, the expenditure cuts proposed in the SAB were not feasible: to achieve even half of the R230bn cuts requires further adjustments to COE.
Subsequently, Treasury revised its expenditure outlook and now expects non-interest expenditure to be higher by R78bn over FY21/22 and FY22/23, relative to the SAB.
Relative to the February Budget, non-interest expenditure is projected to be lower by R156bn – falling short of the R230bn estimated at the time of the SAB.
Crucially, most of the cuts to non-interest expenditure will come from COE. The consolidated COE budget is expected to increase by 2.1 percent in FY20/21 – revised up from a 1.5 percent increase at the time of the February Budget. Thereafter COE is expected to remain relatively unchanged in FY21/22, rising by 1.2 percent in FY22/23, relative to the February estimates of 4.5 percent and 4.4 percent.
To be sure, Treasury expects inflation to average 4.1 percent in 2021, before rising to 4.4 percent and 4.5 percent in 2022 and 2023 respectively. As a result, in rand terms, COE is higher by R0.4bn in FY20/21 and lower by R28.8bn and R50.6bn in FY21/22 and FY22/23.
Among the considered interventions in this regard are a pay freeze for the next three years and the proposal for across-the-board compensation pay reductions for management-level positions and all other senior public representatives across national, provincial and municipal governments as well as stateowned entities (SOEs).
As we expected there were no additional allocations to SOEs except the R10.5bn to SAA in the current fiscal year. This allocation, together with a slightly higher COE budget for FY20/21, will be funded from reprioritised expenditure – thereby the FY20/21 main budget expenditure is relatively unchanged relative to the SAB.
There were minor revisions to the revenue outlook. The tax buoyancy was tweaked marginally lower in FY20/21 to 3.18 from 3.23 and slightly higher to 1.59 and 1.50 in FY21/22 and FY22/23 from 1.58 and 1.46 relative to the SAB estimates.
The tax revenue shortfall is projected to be R8.7bn, R11.9bn and R1.8bn in FY20/21, FY21/22 and FY22/23. This contrasts with the main budget revenue, which is expected to be lower by R1.6bn and R4.6bn in FY20/21 and FY21/22 but higher by R9.5bn in FY22/23. This is slightly puzzling as it is not clear what is pushing non-tax revenue higher.
From a tax perspective, increases of R5bn in 2021/22, R10bn in 2022/23, R10bn in 2023/24 and R15bn in 2024/25 are projected for 2021/22, 2022/23 and 2023/24 respectively. Further detail will be provided in the main budget in February next year.
Main budget deficit:
The less aggressive fiscal consolidation path implies that the main budget deficit is unchanged in FY20/21 and wider in the outer years relative to the the SAB estimates.
After widening to 14.6 percent in FY20/21, the main budget deficit is expected to narrow to 10.1 percent and 8.6 percent in FY21/22 and FY22/23. This is relative to deficits of 14.6 percent, 9.3 percent and 7.7 percent projected in June’s SAB.
Debt-to-GDP is now projected to stabilise at 95.3 percent in FY25/26 compared to 86.8 percent relative to June’s SAB active scenario. Surprisingly, however, Treasury’s debt-to-GDP trajectory aligns with our estimations, despite us having a more pessimistic revenue outlook and thus higher main budget deficits.
This budget was more equity friendly than bond friendly due to the absence of any guidance on potential tax increases next year. The rand weakened and bond yields rose across the curve. The JSE sold off. The weakness was broad based.
- A decline in non-interest expenses is bond friendly, because it will mean the fiscus will be in better shape and more funds will be available to service debt. The absence of tax increases or special taxes may have drawn away from this. The continued allocation of funds SOEs may have been a further drag on sentiment.
- The fact that there were no meaningful tax changes is equity positive – particularly because there was significant fear in the system regarding the possibility of a one-off wealth tax, and prescribed assets. However, an expected cut in the public sector wage bill may have implications for consumer expenditure going forward, which would have detracted from this. Higher potential funding costs for government due to a deteriorating fiscal framework has implications for equity valuations and funding costs – in turn, also negative for equities.
The MTBPS mentioned certain possible changes to Regulation 28. This seems to be focused on allowing investors to allocate more pension funds to infrastructure investments, rather than forcing an allocation to certain investments (so-called prescribed assets).
Siphamandla Mkhwanazi is a Senior Economist for FNB
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