The South African 2021 budget unveiled today was anything but the “non-austerity” budget that Finance Minister Tito Mboweni claimed he was presenting. Indeed, the fiscal plans imply significant tightening and will, if implemented, stabilise the public debt ratio by the middle of this decade. But that will keep the recovery weak and raise the risk of fiscal slippage.
- The South African 2021 budget unveiled today was anything but the “non-austerity” budget that Finance Minister Tito Mboweni claimed he was presenting. Indeed, the fiscal plans imply significant tightening and will, if implemented, stabilise the public debt ratio by the middle of this decade. But that will keep the recovery weak and raise the risk of fiscal slippage.
- South Africa’s fiscal position in the 2020/21 fiscal year is shaping up to be less dire than feared, fuelling an optimistic tone from Finance Minister Tito Mboweni. Government revenues held up better during the pandemic; compared to the Medium-Term Budget Policy Statement (MTBPS) estimate, revenues for the 2020/21 fiscal year are projected to be 1.4% of GDP higher. With the spending outturn largely unchanged, the overall budget deficit has been revised to 14.0% of GDP (compared to 15.7% of GDP in the MTBPS).
- But the government doesn’t seem to be using this breathing space to water down its austerity plan. On the revenue side, the government’s intake is projected to increase as a share of GDP in the next two years (to 28.9% in FY 2022/23). Alcohol and tobacco taxes will be raised, and the fuel levy will increase as well.
- On the expenditure side, restraint seems to be the order of the day. Allocations to fund the country’s vaccination campaign, up to ZAR19bn, were below earlier Treasury estimates. Total primary expenditure is projected to decline from 31.9% of GDP in FY 2020/21 to 26.2% of GDP in 2023/24, in line with the MTBPS. Over the same period, the headline budget deficit is expected to fall from 14.0% of GDP to 6.3%.
- With a smaller pandemic-induced hit to public finances and essentially no change to fiscal consolidation plans, the Treasury expects the debt-to-GDP ratio to peak at 88.9% of GDP in FY 2025/26 – well below the 95.3% previously estimated. (See Chart 1.) The improvement in the debt trajectory prompted, initially at least, a positive response from investors.
- We think that the outlook for public finances is not as rosy as Finance Minister Mboweni’s hopeful speech suggests. The implementation of the fiscal consolidation plans still faces significant risks. It’s notable that the language around a planned contentious public sector pay freeze (which formed the bulk of the expenditure restraint outlined in last October’s MTBPS) has been changed to “fair negotiations” over wages.
- It will remain politically challenging to maintain expenditure restraint given the weak economic backdrop. Indeed, data published yesterday showed that the unemployment rate hit 32.5% in the final quarter of last year. (See Chart 2.) The Treasury only expects GDP growth of 3.3% in 2021 and 2.2% in 2022. Even our own more optimistic forecasts (4.3% and 4.0% respectively) mean that GDP will remain 1.8% below its pre-crisis path by 2022.
- Against that backdrop, there remains a significant risk that the government won’t be able to live up to investors’ hopes, which could put the rand under pressure and cause bond yields to rise.
Chart 1: Gross Loan Debt (% of GDP)
Chart 2: Unemployment Rate (%)
Sources: South Africa Treasury, Capital Economics
Sources: Stats SA, CEIC, Refinitiv, Capital Economics
Virág Fórizs, Africa Economist, email@example.com