Nine things to watch out for in the medium-term budget

Post-pandemic nominal growth expectations: We expect real growth to average negative 0.8% between 2020 and 2023 in comparison to Treasury’s June 2020 forecast of negative 0.4%, given the high risk of load shedding into 2022 and a slow recovery in fixed investment back to pre-crisis levels. Inflation is however expected to materialise at a marginally higher level. As such, our forecasts on nominal growth are broadly in line with those of Treasury.
Tax collection in a fragile growth environment: The standstill in economic activity, triggered by the lockdown restrictions, had a detrimental effect on government revenue, while expenditure trends were only slightly weaker as government embarked on a countercyclical fiscal approach to prop up economic growth through spending.
Developments in the ongoing public sector wage bill dispute: The Organisation for Economic Co-operation and Development (OECD) showed that top managers in SA’s civil service earn an average revenue of nine times the per capita gross domestic product (GDP), which is far higher than the six times recorded for the OECD average. Efforts to stick to proposed wage bill cuts in order will elevate Treasury’s credibility in our opinion.
Ability to supplement pro-poor spending: With the lockdown restrictions having negatively affected a large number of households, calls for a basic income grant have been revived. Though additional taxes are difficult to implement in the current income-constrained environment, increasing support for a basic income grant highlights pressure on government to adopt a formal stance.
Drawing the line on state-owned enterprise (SoE) funding: With explicit guarantees adding around 8% to the debt-to-GDP ratio (total contingent liabilities added around 19% of GDP in the previous fiscal year), any additional guarantees or cash injections would add further strain to government’s balance sheet.
Government’s plan to achieve fiscal sustainability: Given little room to manoeuvre on the revenue front, the extent to which government digs in its heels to curb expenditure growth will determine how successful it is in stabilising the debt ratio in the next five to ten years.
Addressing policy uncertainty: Government’s responses on contentious reforms have remained vague, as these issues remain a function of ideological tensions and are likely to elicit a polarised response from within the ruling party’s structures. Recent developments on the release of state-owned land and increased dialogue around mobilising pension funds for bankable infrastructure projects have alleviated some of the uncertainty in the areas of land expropriation without compensation and prescribed assets.
Momentum behind structural reforms: The Economic Recovery Action Plan is a positive stride towards social compacting, but it has not yet been endorsed by Cabinet and risks dilution, in our view.
Implications for SA’s sovereign rating: With no big reformist effort seemingly emerging from government, we believe the bias to SA’s sovereign rating outlook is to the downside in the medium term.