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Budget 2021: Setting the economy on the road to recovery

In this article, STANLIB’s Chief Economist Kevin Lings and Head of Fixed Income Victor Mphaphuli discuss the positives, negatives and outcomes in SA’s Budget for the year ahead.
MTBPS 2021

Budget 2021: Market-pleasing, but risks remain

In this podcast, STANLIB’s Chief Economist Kevin Lings discusses positives and negatives in SA’s Budget for the year ahead

Budget 2021: delivering the right medicine for the SA economy

STANLIB’s Chief Economist Kevin Lings and Head of Fixed Income Victor Mphaphuli analyse the outcomes of the Budget

Kevin Lings

Kevin Lings

Chief Economist

Victor Mphaphuli

Victor Mphaphuli

Head of Fixed Income

Ndivhuho <br> Netshitenze </br>



Key takeouts 
  • The Finance Minister delivered a sobering Budget speech amidst a weak backdrop characterised by COVID-19 induced economic shutdowns, rising debt: GDP (82%) and the loss of the country’s investment grade credit rating
  • While the Budget balance remains in deficit, the extent of this deficit has been reduced driven by better-than-expected tax revenue collection
  • Despite tax revenue falling short of targets for the seventh year, the Minister avoided any significant tax adjustments and reduced corporate tax rates
  • A slight reduction in budgeted expenditure results from an intention to heavily curtail salary increases over the next few years
  • At this stage, the most viable policy initiatives to drive economic growth would still include:
    • substantially expanding the use of private-public partnerships,
    • the extensive deregulation of the business sector,
    • bold initiatives that make it easier and safer for foreign tourist to visit South Africa,
    • the urgent clarification of key policy pronouncements,
    • a demonstratable focus on restoring good governance, and
    • the urgent reorganisation of South Africa’s energy and water sectors.

The South African Minister of Finance, Tito Mboweni, delivered his third National Budget on Wednesday, 24 February 2021, having been appointed as Minister of Finance on 9 October 2018.


The COVID-19 induced fall-off in global economic activity during 2020 was severe, with world GDP projected to have declined by -3.5%. Although this was slightly less negative than the mid-2020 estimate of -5.2%, the pandemic has already caused more than 2.4 million deaths worldwide, plunging millions of people into poverty.


Encouragingly, in 2021 the global economy is expected to expand by around 5.5%, assuming that the current COVID-19 vaccine rollout becomes much more widespread throughout the year. This is expected to be followed by growth of 4.2% in 2022, as the current high level of pent-up demand in areas such as tourism, travel, and entertainment starts to positively impact most regions of the world. Consequently, limiting the spread of the virus, providing relief for vulnerable populations, and overcoming vaccine-related challenges are key immediate priorities for most economies, including SA.


South African economy urgently needs an effective vaccine and policy implementation to boost economic confidence

The South African economy has experienced numerous economic challenges in recent years, which have been exacerbated by COVID-19. These include a:

  • persistent increase in the rate of unemployment, which ended 2020 at a record high of 32.5%, with the youth unemployment rate over 63%
  • 40% plunge in income per capita (measured in dollars) over the past nine years
  • rampant increase in corruption that has necessitated a special judicial commission of enquiry;
  • sharp rise in government debt from a mere 26% of GDP in 2008/2009 to 82% of GDP in 2020/2021, and
  • the loss of the country’s Investment Grade Credit rating by all three of the government’s credit rating agencies. SA was assigned an A3 credit rating by Moody’s in 2009.

This increase in public sector debt is especially damning considering the deterioration in SA’s socio-economic conditions, especially record high unemployment, regular electricity outages, a fragile water supply, the further deterioration in the provision of public sector health and failing infrastructure in many of the smaller municipalities.


Despite government’s efforts to offset the economic damage inflicted by COVID-19, the South African economy was brought to a near-sudden stop during the second quarter of 2020, which negatively impacted every major sector of the economy. The various economic lockdown measures, coupled with weak consumer and business confidence, exacerbated the already-high level of unemployment and undermined government tax collection. Consequently, the South African economy is expected to have contracted by around 7.2% in 2020, its worst annual performance since at least 1960.


Given these circumstances, it is understandable that the Finance Minister presented a sobering update of SA’s fiscal parameters, with clear evidence of substantial further fiscal deterioration. This reflected a combination of a fall-off in tax revenue collection, albeit not as severe as envisaged in the October 2020 Medium-Term Budget Policy Statement (MTBPS), together with the need to accommodate additional transfers to SOEs as well as pay for COVID-19 vaccines. It is also clear that controlling the ongoing fiscal deterioration is likely to remain extremely challenging over the next few years.


Challenging policy choices

The policy choices contained in this year’s National Budget also reflect the fact that fiscal policy is currently ineffective in directly revitalising the South African economy. In particular, government simply cannot afford to cut taxes extensively to boost household consumption and corporate investment, given the extreme fiscal constraints.


Equally, the fiscal authorities have very little scope to meaningfully increase public spending, including social payments, given that the current debt trajectory has worsened considerably. Fortunately, there is a clear intention on the part of government to implement a range of drastic changes to its budget to control expenditure and at the same time find a way to implement a series of growth-friendly policy initiatives, including government’s infrastructure initiative.


However, the success of government’s growth and employment agenda in 2021 and beyond will be determined, not by the quality of the policy document, but by its ability to make progress in implementing real reforms that encourage the business sector. Closing the gap between SA’s current trend growth rate and a modest target of 3% on a sustained basis is going to require a significantly larger implementation effort than is currently evident, including the co-ordination of economic policy across key government departments and actively partnering with the private sector.


The 2021/2022 Budget numbers

For the 2021/22 fiscal year, the Minister of Finance announced that the budget balance should improve to -9.3% of GDP, up from a revised and dramatic -14% of GDP in 2020/2021. The outcome for 2020/2021, while extreme by historical standards, was better than the -15.7% of GDP the minister projected in the October 2020 MTBPS, largely as a result of a better-than-expected improvement in tax revenue towards the end of the fiscal year.


Crucially, in 2022/2023 the fiscal deficit is expected to improve further to -7.3% of GDP, before reaching -6.3% of GDP in 2023/24. The minister intends to restore fiscal discipline, although he acknowledges that it will take several years before the budget deficit is at a comfortable and sustainable level.


It should be noted that in the prior decade, government persistently aimed to reduce the budget deficit to below -3% of GDP on a sustained basis. It was clearly unable to meet the target, largely as a result of weak economic growth and its inability to rein in government expenditure, especially consumption spending and salary expenses.


The government also acknowledges that it will only be able to achieve a primary budget surplus (which is the budget deficit less interest costs) in 2024/25. A primary surplus would go a long way towards convincing the public, investors and credit rating agencies that government is serious about its intention to maintain a disciplined financial framework. In previous years the government also projected a return to a primary budget surplus but failed to achieve the necessary level of fiscal consolidation.


For 2021/2022 the government is projecting a primary budget deficit equivalent to a very substantial -4.1% of GDP, but then the primary balance is expected to improve to a much more manageable deficit of only -0.5% of GDP in 2023/2024.


Given the fiscal deterioration in recent years, it is encouraging that the Minister of Finance repeated his intention to actively control the rate of increase in salary expenses – see discussion below. However, without an acceleration in economic activity, the fiscal authorities will continually struggle to meet their revenue targets as well as their budget objectives.


It is concerning that the minister forecast SA GDP slowing from 3.3% in 2021 to only 2.2% in 2022 and a mere 1.6% in 2023. The projected slowdown in economic growth will make it extremely difficult for government to achieve its level of fiscal consolidation. Given the current balance sheet constraints within central government as well as the SOE sector, economic policy will have to increasingly focus on the role of the private sector in driving economic growth. We hope this includes a greater reliance on private-public partnerships as a means of lifting fixed investment spending.


The revenue side of the Budget

In 2020/2021, tax revenue massively underperformed budget by an estimate R213.2 billion, implying that total revenue declined by a significant -10.6% year-on-year. This is SA’s worst tax performance since at least 1996. Encouragingly, however, the shortfall of R213.2 billion is actually R99.6 billion less than the Minister of Finance estimated in the October 2020 MTBPS.


While this is a welcome improvement, it does indicate that the minister overstated the extent of the shortfall in the MTBPS, aggravated by the uncertainty surrounding the impact of the COVID-19 lockdown on the performance of the economy.


A breakdown of the 2020/21 tax revenue shortfall highlights that the under-collection was broad-based. The biggest deficit came from individual tax collection (R64.6 billion behind budget), company tax (R41.4 billion), VAT (R36.6 billion) and excise duties (R24.1 billion). On a positive note, while no tax category outperformed the 2020 Budget, government paid out R33.9 billion less in VAT refunds in 2020/21, helping to limit the loss to net VAT receipts.


Unfortunately, the latest revenue shortfall means that government has missed its revenue targets for the seventh consecutive year. In the past this forced the authorities to look for additional sources of revenue. In the 2017/2018 Budget the emphasis was on increasing the top marginal tax rate for individuals from 41% to 45%, whereas in 2018/2019 the decision was taken to increase the VAT rate from 14% to 15%. In 2019/20, the government decided to raise additional funds by not adjusting for “bracket creep”.


Fortunately, and very positively, in the 2021/2022 Budget the Minister avoided any significant tax adjustments. In fact, one of the key surprises in this year’s Budget is the decision by government to introduce an above-inflation adjustment to personal income tax brackets and rebates.


This should provide individuals with R2.2 billion in tax relief, especially lower‐ and middle‐income households. For example, as a result of the adjustment to the tax thresholds, a person earning R250 000 will pay R1 580 less tax for the year, while a person earning R1 million will pay R5 140 less. While these amounts are modest, they are welcome, since many people were concerned that government would be forced to increase personal income tax given the large revenue shortfall.


Other significant tax changes in 2021/2022 include a further, but unsurprising, inflation-related increase in the fuel levy, an above-inflation increase in the Road Accident Fund (RAF) levy, and the usual array of excise duties increases, especially on cigarettes and alcohol. Interestingly, government is looking to change the nature of the RAF to a no-fault system during the coming year.


The Minister also announced government’s intention to reduce the corporate income tax rate from 28% to 27% next year to improve investment and competitiveness, although some conditionalities will need to be met to benefit from the reduction. The reduction in company tax is expected to be done on a revenue-neutral basis by reducing the number of tax incentives, expenditure deductions and assessed loss offsets.


Overall, for 2021/2022 tax revenue is projected to increase by a substantial but achievable 11.6% year-on-year or R157.7 billion. It would have been very tempting for the fiscal authorities to increase a broader range of taxes, including introducing a new wealth tax, a super-high income tax rate or a further increase in the VAT rate to help mitigate the large fiscal shortfall.


However, this year’s Budget highlighted that government is reluctant to increase taxes, given the current weak economic environment and the fact that it would most likely have proved counterproductive. This is not simply from a political perspective, but also through its likely negative effect on tax morality and tax compliance.


Consequently, the tax relief for individuals, the modest number of tax changes as well as the extent of the tax adjustments the minister announced seem largely appropriate in the current economic circumstances. Government will, however, continue to investigate the implementation of a wealth tax, but more work needs to be done on the feasibility of any wealth tax, especially the cost associated with administering it.


The expenditure side of the Budget

In 2021/2022 government is budgeting to spend R2.02 trillion, which is -1.6% less than it spent in 2020/2021, helped enormously by its intention to heavily curtail salary increases over the next few years – see discussion below.


The bulk of government’s spending is still allocated to education at R392.4 billion or 20.1% of total expenditure, followed by social protection at R339.7 billion (17.4% of expenditure) and healthcare at R243.7 billion (12.5% of expenditure). Unfortunately, the fast-growing area of government spending remains debt servicing costs, which is projected at 13.8% of total expenditure in 2021/2022, an increase of 15.8% year-on-year – see discussion below.


Unfortunately, there is still not enough in the Budget to directly promote job creation, although the minister did provide for a further R11 billion to be spent on the President’s employment initiative, which has been reasonably successful within a fairly short period. According to National Treasury, by January 2021 the initiative had created 430 000 jobs of varying duration and aims to create another 180 000 such jobs by March 2021.


It is also noticeable that the minister has provided for a net reduction in social payments, although unemployment insurance benefits, through the Unemployment Insurance Fund (UIF), have been extended for another three months to April 2021 at a cost of R2.1 billion. This will increase spending on the COVID-19 Temporary Employer/Employee Relief Scheme to R73.6 billion in 2021/22. At end-January 2021, the UIF had paid R57.3 billion to 13.9 million workers.


Critically, the minister allocated R10.3 billion over the next two years to finance SA’s procurement of suitable COVID-19 vaccines. More specifically, R1.3 billion has been allocated for vaccines in 2021, while R9 billion has been budgeted for vaccines in 2022.


Lastly, it is worth mentioning that the increase in expenditure includes a significant increase in the Contingencies Reserve, which jumps from R5 billion to R12 billion. This will provide government with some flexibility to allocate additional funding for national emergencies, natural disasters, perhaps even struggling SOEs, or for vaccine rollouts.


Adjustments to the public sector wage bill

Government’s intention to substantially curtail salary increases over the next three years remains a key focus area in this year’s Budget. Over the last 10 years, compensation of public sector employees has become one of the largest components of government spending. As a percentage of total spending, it accounted for 35.4% of total consolidated expenditure in 2018/19. In 2019/20, this decreased to 34.1%, and it is expected to decrease further to 32% in the medium term. While the minister acknowledged the importance of public servants for the delivery of public services, he underscored the need to curtail compensation spending to increase the allocation of resources to capital expenditure.


Given these savings, government estimates that compensation at the consolidated budget level will grow by 2.1% in 2021/22 and 1.2% per year over the medium term. The savings will be achieved by doing away with the annual cost-of-living adjustment in the public service up to 2023/24, together with measures to reduce headcounts through a combination of early retirement and natural attrition, as well as freezing or abolishing non-critical posts.


Even by international standards, SA’s wage cost is exceptionally high at around 14.8% of GDP, which is about five percentage points higher than the Organisation for Economic Co-operation and Development average, and in line with Iceland and Denmark.


Regrettably, government’s aim to limit the growth in salaries will restrict economic activity, as those salaries are necessary to support household consumption. Therefore, government needs to inject stimulus elsewhere to offset this effect and ensure that economic activity is not negatively affected by these austerity measures.


While the Minister has clearly outlined government’s intention to control salary expenses, it is unclear whether this plan can be achieved, given the uncertainty about the outcome of the current multi-year wage agreement.


From our perspective, the current wage negotiations, which started in November 2020, still have a long way to go before reaching a binding three-year agreement. The scheduled wage increase for last year remains in dispute and might only be settled in court. Correspondingly, it is possible that the minister might be forced to revise up his salary budget when he presents the MTBPS in October 2021.


Debt servicing costs continue to rise at a very rapid pace

As mentioned previously, SA’s public sector debt is projected to continue increasing as a result of the larger-than-expected fiscal deficits in recent years. Already the cost of debt is estimated to have risen to almost 20% of total revenue in 2020/2021 and it is projected to reach 22.2% of revenue in 2023/2024. This means that the cost of state debt is the fastest-rising element in the budget, highlighting the need for government to contain the fiscal deficit to reduce total debt as a percentage of GDP.


Under these circumstances, a significant rise in bond yields, for whatever reason, would put SA’s fiscal position under increasing strain. Already the cost of debt exceeds the total budget allocation for key government departments, including public order and safety, healthcare, and housing development.


Very encouragingly, the better-than-expected revenue outcome, coupled with government’s decision to borrow significantly more than required in 2020/2021, means that government’s gross debt to GDP is now projected to peak at around 88.9% of GDP in 2025/2026, which is significantly down from the October 2020 estimate of around 95%. Clearly significant risks remain to this projection, including a larger-than-expected increase in salary costs, further tax revenue shortfalls, sustained weak economic growth, and further funding requirements from the major SOEs.


South Africa’s credit rating

Given the sharp fiscal deterioration reflected in last year’s MTBPS and the negative economic impact of COVID-19, Moody’s and Fitch downgraded SA’s international credit rating by one notch on 20 November 2020. In particular, Moody’s downgraded the credit rating from Ba1 to Ba2 and maintained a negative outlook on it, while Fitch downgraded the credit rating from BB to BB-, also with a negative outlook.


In contrast, S&P kept the credit rating unchanged at BB-, but with a stable outlook. This means that S&P and Fitch have SA on the same credit rating, while Moody’s is effectively one notch higher – but all SA’s international credit ratings are now below investment grade.


The key driver behind the rating downgrades was the further expected weakening in SA’s fiscal strength over the medium term. While SA is not the only country to have been severely affected by the crisis, its capacity to mitigate the shock over the medium term is regarded as lower than that of many sovereigns, given significant fiscal, economic and social constraints and rising borrowing costs.


More positively, the 2021/2022 National Budget will clearly help to mitigate some of the concerns that credit rating agencies have highlighted in recent years. However, they will most likely adopt a “wait-and-see” approach to any further credit rating adjustments. In particular, they will evaluate government’s ability to implement some of the critical fiscal consolidation initiatives outlined in the Budget, while at the same time lifting economic growth.


Unfortunately, while the government has identified several key policy initiatives that could help to re-invigorate the South African economy (such as infrastructural development) there is still not enough evidence of implementation. Unsurprisingly, the implementation of sound economic policies builds confidence, but the opposite is also true. If SA can make progress in lifting economic growth and reinstating its fiscal credibility, international credit ratings should start to stabilise and then slowly rise.



The 2021 National Budget was presented under extreme economic conditions, aggravated by a deep and protracted recession that resulted in a very significant tax revenue shortfall. It is encouraging that the Minister did not attempt to deliver a politically-expedient budget, nor was there any shock tax announcements. Instead he reiterated the need to curtail the increase in government’s salary costs.


The success of this year’s Budget will be determined by government’s ability to make real progress in reducing its salary expenses, given the clear rejection of this proposal by Cosatu. Offering the trade union increased job security in return for more modest salary increases is going to be challenging task, and may yield only limited success.


While there are several policy options available to revitalise the South African economy in the medium-term (one to three years) and therefore improve government finances, the range of workable solutions has diminished substantially over the past ten years, given the destruction of the public sector’s balance sheet and the weakening of key public sector institutions, including many SOEs.


At this stage, the most viable policy initiatives would still include substantially expanding the use of private-public partnerships, the extensive deregulation of the business sector in a concerted effort to make it easier to do business and lift business confidence, bold initiatives that make it easier and safer for foreign tourist to visit South Africa, the urgent clarification of key policy pronouncements, a demonstrable focus on restoring good governance, and the urgent reorganisation of SA’s energy and water sectors.

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