MTBPS 2021: A balancing act
Finance Minister Enoch Godongwana presented an MTBPS on Thursday that reassured markets he is determined to restore fiscal discipline and continue the policy framework of his predecessor, Tito Mboweni.
In his speech, he emphasised that government has “an unflinching commitment to fiscal sustainability, enabling long-term growth by narrowing the budget deficit and stabilising debt.”
The MTBPS showed a R120 million improvement in tax revenue collection compared with the Budget projection, which will be used to fund a R59.4 billion overrun in government spending as well as reduce debt.
In these podcasts, STANLIB’s Chief Economist, Kevin Lings, discusses the main points of the minister’s presentation and what it means for the South African economy in the coming months, while Head of Fixed Income, Victor Mphaphuli, explains what it means for local bond markets.
Listen to our podcasts below
STANLIB’s Chief Economist, Kevin Lings, discusses the positive features of the 2021 Medium Term Budget Policy Statement, as well as areas of continued uncertainty.
STANLIB’s Chief Economist, Kevin Lings, and Head of Fixed Income, Victor Mphaphuli, look at how bond markets have reacted to the MTBPS and the likely response of the credit rating agencies.
South Africa’s Medium Term Budget Policy Statement November 2021 – a brief review by Chief Economist, Kevin Lings and the STANLIB economics team
SA’s Finance Minister, Enoch Godongwana, presented his first Medium-Term Budget Policy Statement (MTBPS) on 11 November 2021, under challenging economic conditions, after having been appointed in August 2021.
Ahead of the MTBPS it was hoped that the Minister would update and clarify a large number of critical fiscal policy issues. These included: the extent of SA’s tax revenue windfall in 2021/2022 and the likely continuation of improved revenue receipts; an update on whether the R350 a month special COVID-19 Social Relief of Distress Grant, which was extended until end March 2022, would be stopped or extended for a further period; clarity on government’s projected salary expenses for the next three years, given the higher-than-expected wage agreement in 2021/2022; government’s borrowing requirement for the remainder of the current fiscal year; progress in reducing government’s debt-to-GDP ratio, especially given the additional revenue collection and upward revision to SA’s GDP estimate; any additional capital transfers required by state-owned enterprises (SOEs) and municipalities; and, more broadly, policy measures that can be effectively implemented to urgently lift economic growth and job creation.
Transitioning from one Minister of Finance to the next always increases the risk of policy uncertainty as the new Minister endeavours to nudge the country’s fiscal framework in the direction he and his team deem most appropriate. It is useful to reflect on three quotes extracted from the October 2020 MTBPS presented by Minister Tito Mboweni:
- “Government spending remains too high for the tax base and expenditure is skewed towards compensation, rather than investment, at the expense of future generations”
- “The government’s fiscal position is one of the central impediments to economic growth, and a failure to reverse present trends would inevitably lead to a debt crisis”
- “Structural weaknesses in the real economy have contributed to persistently poor economic outcomes and reduced long-term potential growth”.
Not only did Minister Godongwana address most of the critical fiscal policy issues outlined above, he also largely maintained government’s existing policy framework on the need to achieve an improved level of fiscal discipline. Although the question of the extension of the R350 a month social payment as well as clarity on government salary costs was delayed until at least the February 2022 National Budget, the Minister made it clear that these expenditure items can only be considered if government is in a position to afford the additional expense. At this stage it is clear that government is simply not able to afford a further large increase in consumption-related expenditure.
Overall, though, it is clear from the vast array of data provided by National Treasury that the current fiscal and economic reforms are only expected to begin yielding meaningful results over the next several years. This is reflected in the fact that National Treasury is projecting GDP growth to average only around 1.7% a year over the next three years, while government debt is projected to reach a peak of 78.1% of GDP in 2025/26 before starting to moderate.
SA’s economic recovery
National Treasury has revised up its 2021 GDP forecast to 5.1%, although this mostly reflects a recovery from the COVID-19 related decline of -6.4% in 2020. Unfortunately, the growth estimates for the next three years are largely unchanged at an average of around 1.7% per annum. While these growth estimates appear realistic and achievable, they highlight the lack of vibrancy in the South African economy. Under these circumstances, SA will struggle to meaningfully lift the level of employment or broaden the tax base. Consequently, the rate of unemployment would be expected to continue to rise. It is worth repeating that if government makes a concerted effort to implement the needed policy reforms, economic growth could easily exceed these estimates over the medium term.
Encouragingly, National Treasury does envisage a pick-up in fixed investment spending in both 2022 and 2023 after many years of sustained contraction. Presumably this growth in fixed investment is supported by government’s current infrastructural development initiative, including allowing the private sector to get more fully involved in the provision of electricity.
In terms of inflation, the MTBPS assumes that the average annual rate of increase in consumer prices will remain around the midpoint of the inflation target over the next three years, slowly rising from an average of 4.5% in 2024. (SA’s inflation target is currently 3% to 6%, although the Reserve Bank has highlighted the need to achieve a target of 4.5%)
Update on tax revenue collection
For the 2021/22 financial year, government is expecting to collect R1.49 trillion in tax revenue, which is a massive R120.3 billion above the budgeted tax revenue presented in the February 2021 Budget. This is the first time since 2013/14 that government has had a tax overrun and it is largely in line with what was expected, given the strong monthly tax revenue collection since April. This additional revenue implies that total revenue growth will more than double during the current tax year, with tax revenue growing by +18.8% year-on-year vs a budgeted increase of +9.2%. The tax revenue-to-GDP ratio is expected to increase from 23.1% to 24%.
According to the MTBPS, the areas of tax that are driving the strong rebound in revenue collection are corporate income tax, which is expected to grow by 42.8% year-on-year and, to a lesser extent, personal income tax, which is expected to increase by 11.3% year-on-year. A breakdown of the tax revenue overrun shows that R75.5 billion (62.8%) of the additional revenue will come from corporate income tax collection amid higher profitability in the mining sector from elevated commodity prices. Personal income tax collection is expected to contribute R26.1 billion (21.7%) to the additional revenue, as average wages had rebounded almost to 2019 levels by the first quarter of 2021.
It is important to note, however, that the strong performance in tax revenue is off a low base, given the impact of COVID-19-related lockdowns on economic activity last year. Therefore, despite this overrun, tax revenue remains well below pre-pandemic expectations. For example, in the 2020 Budget, tax revenue was projected to be R1.51 trillion. This means that tax revenue will still be almost R27 billion below the 2020 projections.
In the medium term, government tax revenue looks encouraging, with collections expected to increase to R1.46 trillion in 2022/23 and R1.55 trillion in 2023/24. While this is an improvement compared with February’s projections (with the overruns coming at R69.7 billion and R59.5 billion respectively), the 2022/23 forecast will still be R82 billion below the projected collection at the time of the February 2020 budget. In addition, there is a very real risk that elevated mining revenues become unsustainable, given that the current commodity price boom is expected to moderate. There is also the risk that some other areas of tax revenue underperform, given the low growth projections by National Treasury. According to the scenarios outlined in the MTBPS, GDP growth could be as low as 0.9% by 2024, which would severely undermine tax collection, given the low tax buoyancy rates. Therefore, it is entirely possible that government might fail to collect the projected tax revenue in the next three years, placing further strain on its fiscal consolidation plans.
It is abundantly clear that without a sustained increase in economic growth, accompanied by an increase in employment and an improvement in revenue collection and tax morality, the government may to struggle to meet its revenue targets. Without higher economic growth, tax collection will continue to dwindle, scuppering government’s attempts to meet its social economic objectives.
Update on government expenditure
According to the MTBPS, government expenditure will rise by R59.4 billion relative to the estimate presented at the time of the National Budget in February 2021. A large portion of this increase (R32.85 billion) is due to “Public violence and the COVID-19 fiscal relief package”, which includes a larger transfer to SASRIA as well as additional expenditure related to the R350 special COVID-19 Social Relief of Distress Grant that was extended to March 2022. In addition, government has had to spend an extra R20.5 billion on salaries, given the higher-than-expected wage increase for 2021/2022.
The 2021 wage agreement provided for a salary increase of 1.5%, but also a cash gratuity of R1 000, after tax, per person per month. Unfortunately, if no new wage agreement is reached for next year, the cash gratuity will be extended, costing the government an additional R20.5 billion. Should it be necessary for government to pay the final leg of the 2018 wage agreement retroactively, this would add substantially to the current expenditure overrun.
Interestingly, the Minister of Finance clearly noted that the current social relief of distress (SRD) grant of R350 a month is coming to an end in March 2022. The grant has benefited about 9.5 million people. This is over and above the existing social security grants. Currently 27.8 million South Africans receive a social grant, which is around 46% of the population. As highlighted earlier, the Minister of Finance made it clear that further increases in social payments can only be considered if government is able to afford the additional expense.
The efficiency of government spending has deteriorated significantly over the past 15 years, with the Auditor-General reporting a substantial increase in wasteful and unauthorised expenditure in recent years. This, coupled with high levels of corruption, massively undermines the effectiveness of government services, negatively affecting confidence. It is very encouraging that the Minister of Finance is clearly endeavouring to adhere to the fiscal discipline measures initiated by Minister Mboweni.
Other policy commitments
In recent years, the government has raised expectations of the implementation of several ambitious projects, such as National Health Insurance. Achieving these ambitious goals is going to become increasingly problematic unless there is a substantial increase in tax revenue, and an improvement in the efficiency of government expenditure. In 2016, Minister Pravin Gordhan made the point that “the quality of government spending needs to be improved. Too much public spending is regarded as wasteful, too much is ineffectively targeted and too little represents value for money.” Minister Gordhan stressed that “fiscal resources do not match long-term policy aspirations”. Since then, government’s policy aspirations have increased, while the fiscal resources have deteriorated, limiting government’s ability to close the gap between policy intention and enactment.
The MTBPS shows a commitment by National Treasury to limit transfers to state-owned companies along with little additional allocations to municipalities. If this approach can be maintained, it will go a long way towards helping government to achieve an improved level of fiscal discipline, thereby encouraging further foreign investment and the possibility of credit rating upgrades.
As mentioned in the introduction, the Finance Minister did highlight the importance of collaborating more meaningfully with the private sector to lift economic growth, drive employment creation and encourage innovation. In general, the minister’s speech reiterated the importance of private-public partnerships in developing the South African economy. Unfortunately, though, this commitment was not present in government’s spending plans. The MTBPS failed to allocate a significant amount of money to infrastructure spending within government.
The curtailment of the fiscal deficit and government debt
The R120 billion tax revenue windfall, together with the recent 11% upward revision to SA’s estimate of GDP, has allowed the Minister of Finance to present an improved set of key fiscal parameters. For example, National Treasury is now projecting a budget deficit for 2021/22 of -7.8% of GDP, which is well down from the -9.3% that was projected at the time of the February 2021 National Budget. Gross government debt is expected to peak at 78.1% of GDP in 2025/26 and decline thereafter, while debt service costs will fall below 22% of main budget revenue by 2026/27.
While these fiscal parameters remain concerningly high, they are a substantial improvement on projections made just two years ago. However, the deficit and debt targets are only achievable if government continues to implement significant fiscal reforms, especially in relation to salary costs, while at the same time ensuring that economic growth improves well beyond 2% a year. This suggests that the risks to government finances are, unfortunately, firmly to the downside until the various initiatives to embed fiscal discipline and lift economic growth have been more fully achieved.
This dire situation is highlighted by the fact that the interest cost of government debt is still projected to grow at a double-digit annual rate for the next three years. This means that in 2025/2026, government’s interest costs alone will represent around 5.3% of GDP, thereby limiting the expenditure choices government can consider over the next few years.
It is clear that National Treasury is committed to ensuring that government achieves an improved level of fiscal discipline over the next few years, which is to be applauded, given the challenging economic, social, and political environment.
In the short term, financial markets, especially the local bond market, are likely to be fairly pleased with the detail contained in today’s MTBPS. This is partly because government announced an improved set of fiscal parameters, as well as the intention to control social payments and salary adjustments. It is clear that the Minister of Finance strongly intends to push ahead with various critical fiscal reform measures in an endeavour both to control the overall increase in government expenditure and increasingly alter the mix of spending away from consumption and in favour of increased fixed investment activity such as infrastructural developments.
Unfortunately, this positive view does not take account of three key concerns. Firstly, controlling government’s wage cost over the next few years is going to remain challenging. Secondly, the projected increase in tax collection over the next three years might be difficult to achieve, given that economic growth is not projected to rise above 2%. Thirdly, there is a still a real risk that various SOEs will require additional government support over the coming years.
Ultimately, there is no substitute for higher economic growth in resolving SA’s fiscal constraints. This can only be achieved through a concerted and co-ordinated effort to lift business and household confidence, improve private sector fixed investment, as well as enhance skills development and productivity. This going to require a much greater effort in implementing key policy reforms. Without these reforms, private sector investment is likely to continue to stagnate, exacerbating the already high level of unemployment and increasing the risk of further social unrest.