Old Mutual Investment Group economist, Johann Els

Old Mutual Investment Group economist, Johann Els, has urged the Minister of Finance, Enoch Godongwana, to deliver a positive outcome in his inaugural Medium-Term Budget Policy Statement (MTBPS) this month, that allocates the 2021/22 tax revenue overrun for maximum long-term benefit. 

“My wish is that the Minister prioritises fiscal consolidation by recommitting government to the agreed public sector wage bill savings and by resisting populist calls for additional unaffordable spending such as a basic income grant,” said Els.

The MTBPS, scheduled for 11 November 2021, will update the country on Treasury’s mid-term expenditure and revenue expectations, while offering valuable insights into future fiscal policy direction. Analysts will be watching closely for any news on a move to zero-based budgeting as well as updates on key expenditure areas, especially those dealing with the public sector wages and social expenditure. They will also monitor the Minister’s presentation for the slightest hint of a shift in policy direction, with an increased chance of this following the recent poor local election results for the ruling party. “Changes to policy can have a significant impact on both the expenditure and revenue side of the budget, and policy certainty remains a crucial aspect in reducing our fiscal risks down the line,” said Els.

The domestic economy has enjoyed somewhat of a resurgence since the October 2020 MTBPS. At the time, the Covid-19 pandemic and national lockdown had negatively affected both sides of the fiscal accounts. Since then, South Africa has benefited from a strong V-shaped global economic recovery, coupled with supportive terms of trade on the back of increases in commodity prices. Els says the strong revenue outperformance that the country has benefitted from will assist Treasury in reducing the deficit, provided populist expenditures are kept in check.

Minister Godongwana has been under increasing pressure since his appointment in August to introduce some form of basic income grant, though it is widely thought to be unaffordable at this time. Els believes that the Minister may well delay an announcement on new grants in favour of boosting other social protection schemes, for example, by converting the existing Covid-19 relief grant into a permanent feature of the grant landscape. But it may not be as easy to keep the public sector wage bill under control. “Government could consider negotiating a quid pro quo arrangement with the public sector, perhaps spending more on wages in exchange for meaningful policy reforms,” suggests Els.

Els sees three positive underpins for the 2021 MTBPS. The first is that South Africa’s fiscal risk has shown substantial improvement. The country’s budget deficit as a share of GDP is likely to improve from the -15.7% forecast in the October 2020 MTBPS to just -6.6% (by Els’s estimates) for the 2021/22 fiscal year. The second positive is the forecast reduction of some R251 billion in the total deficit, from R660 billion to just R409 billion, largely on the back of higher-than-expected tax revenue collections. “We have seen a significant revenue boost thanks to the economic recovery, and my conservative estimate for the main tax revenue components shows a total revenue overrun compared to budget of R122 billion,” said Els.

As a result, the overall fiscal picture will be far better than the one presented during the 2020 MTBPS or the February 2021 National Budget, both of which were conservatively stated due to concerns over the pandemic. Els forecasts an 18.1% boost to 2021/22 revenue; a 0.1% reduction in that year’s expenditure; and a debt balance as a percentage of GDP of just -6.6%. He expects the positive trend to continue into the 2022/23 fiscal year, which should deliver moderate revenue growth against slightly higher expenditures. 

“Some revenue outperformance is likely to continue relative to previous medium-term budget frameworks; but the biggest fiscal risk still stems from expenditure pressures, the extent of which may only become clear with policy certainty,” concluded Els. 

“That said, it has been some time since Treasury has had so many options to make meaningful and lasting fiscal improvements; we wish Minister Godongwana well in leveraging the lower-than-forecast debt profile and improved growth outlook to substantially reduce our fiscal risk going forward”.