Beyond promises: An excellent budget with plan to reduce issuance extremely positive signal

After a very difficult year, the National Treasury has produced an excellent budget. There was always a concern that given the growing evidence of higher than forecast revenues, expenditure would slip a lot in the coming years from the October Medium-Term Budget Policy Statement (MTBPS) forecasts.

This did not occur. The February 2021 acknowledged the higher than expected revenue collections for the current fiscal year – likely to be about R103bn higher than forecast in the MTBPS. However, the Treasury are using the bulk of this windfall to consolidate South Africa’s immense debt burden.

Expenditure has been raised by R33bn in the coming year, mainly to fund COVID-related expenditure and to support a Public Employment Initiative that will effectively replace the Special COVID grant. These are sensible and required spending increases.

There was no increased allocation to wages. This is important. Wages consume a very large share of South African government expenditure and very little in the way of service delivery is provided in return. While the average health care worker deserves a bonus from a grateful nation, many other public sector workers don’t.

Higher revenues and restrained expenditure left the Treasury room to cut local debt issuance by R92bn in the coming year. This reduction in issuance is key – both as a signal to the bond market that Treasury believes in its consolidation plan and to lower debt service costs.

In the coming fiscal year, one in every five rands the government raises in taxes will be spent on interest costs. That is not sustainable. The solution to reducing this interest bill is to issue less debt.

Therefore, we view the plan to reduce issuance as an extremely positive signal from the National Treasury. South African bonds are vulnerable to rising global bond yields. However, the upward pressure will be mitigated by the 2021 Budget. For the benefits to be sustained, we need to see continued commitment to restraining the wage bill. Without that, the reduction in issuance will be short-lived.

ENDS