MTBPS: Government’s commitment to Fiscal Consolidation still intact

Tito Mboweni’s Medium-term Budget Policy Statement (MTBPS) was far from good enough to avoid a debt trap and, combined with the Reconstruction and Recovery Plan that also fell short of what is needed in South Africa at this point in our history, the risks have increased significantly.

This was the view of Old Mutual Investment Group Chief Economist, Johann Els, who said that while Treasury has encouragingly strengthened the proposed Wage Bill cuts, slippage in planned non-wage expenditure cuts from the June Supplementary Budget raises serious concerns about whether SA will be able to avoid a fiscal cliff.

The MTBPS announced that Treasury’s GDP growth forecast has been revised to a contraction of 7.8% in 2020 compared to -7.2% forecast in the June budget, but it expects a rebound to 3.3%Y in 2021 compared to 2.6%Y in June, followed by 1.7%Y in 2022, compared to 1.5%Y in June. The consolidated Budget balance is expected to decline from -15.7% in 2020/21 to -7.3% by 2023/24.

“The risk we are facing as an economy is highlighted in the abandonment of the active scenario that was presented in June as the only way to avoid a debt trap,” explains Els. “With the debt ratio expected to peak even higher (95% vs 87.4% in June) – and with clear upside risks – the fiscal cliff is getting ever closer.”

He adds that while the MTBPS overall was disappointing, Government’s fiscal consolidation intent still appears clear, which should calm the markets.

“The February Budget proposed R160bn in wage bill cuts and the June Budget added R230bn in cuts in non-wage non-interest spending, thus a total of R390bn. But the MTBPS leaves total cuts now of only R306bn,” points out Els. “This MTBPS reduced the proposed non-wage, non-interest spend to decline by only R68bn, which means that the bulk of proposed expenditure savings is set to come from Wage Bill savings, which will see a total of R238bn of savings – R160bn as announced in Feb lus an additional R78bn. Government plans to freeze public sector wages for the next three years.”

Additional expenditure announcements were that zero-based budgeting will be an ongoing process – to be implemented from 2022 MTBPS – and extra spending this year of R10.5bn to SAA, R12.6bn for job creation and R6.7bn for extra TERS grant, will all be implemented in a deficit neutral manner, i.e. cuts and reprioritizations to finance, says Els. There will also be no further extensions to grants.

When it comes to the revenue announcements, Els believes that fiscal consolidation is not unduly premised on optimistic revenue forecasts or extra tax hikes. “The Minister has made a clear statement that tax increases are not part of the solution,” he highlights. “This is very conservative revenue budgeting, providing scope for revenue outperformance. There was also no mention of extra revenue streams such as the sale of spectrum or potential overshoot of mining taxes.”

ENDS