Leading up the 2021 Budget speech South Africans could be forgiven for not being too optimistic about the prospects, especially when considering the Medium-Term Budget Policy Statement shared in October 2020.
That concern was arguably not fully justified as the finance minister announced a budget that addressed some major concerns and a path to improvements on the debt to GDP ratio and the budget shortfall.
Government debt to GDP is forecasted to peak at 88.9% in 2025/26 and to decline thereafter, which is an improvement on the 95.2% level that was previously forecasted. In addition, the debt shortfall is estimated to be 14.0% in the current financial year but will decline to 6.3% by 2023/24. The current shortfall has increased from 5.7% in part as a result of the additional expenditure and smaller revenues due to lockdowns. Although a tax shortfall of R213bn has materialised, this was an improvement from the mid-term forecasts and has allowed for a reduction of corporate tax to 27%, and a 5% allowance for bracket creep in income taxes.
Spending on infrastructure came under the spotlight with government committing R791.2bn for infrastructure development with the caveat that tariffs will be required to augment costs. The minister also hinted at possible adjustments to Regulation 28 of the Pension Funds Act, as it applied to the allowance of infrastructure investments and how foreign direct investment rules will apply to primary offshore and dual listings. More information on the possible changes to Regulation 28 is expected before the end of the month. Government has also made available more than R10bn for vaccines over the next two years and increased the contingency fund from R5bn to R12bn, should additional vaccine expenses be required.
The more concerning aspect of the budget remains the cost to service debt, which has now increased to R269.7bn or 20.9% of gross tax revenue, as well as the annual additional borrowing requirement of more than R500bn per year over the medium term. This will mean that gross loan debt will increase from the current level of R3.95tn to R5.2tn in 2023/24. Little has been revealed with regard to state-owned enterprise (SOE) spend, apart from the R7bn that was awarded to Landbank. The forecast for SA GDP growth also underwhelmed after the expected initial bounce this year, with real growth of 1.9% per year is expected in the subsequent two years. This compares unfavourably to the expectation of global growth in the corresponding years. The effect of the weak labour market, business shortfalls and low consumer confidence will have a 2.2% effect on growth in 2022 and 1.6% in 2023.
The budget made little room for increases in public sector wages. In 2020/21, wages accounted for 47% of revenue and following the decision to not implement a wage increase in 2020/21 an average increase of 1.2% per annum over the medium term was budgeted. It remains to be seen if public sector workers would agree with the minister’s assessment that this was not an austerity budget.
What was widely expected to be a sobering budget ended up more positive than most expected. Debt levels are expected to increase but are forecasted to be lower than previously expected and most importantly to peak in the coming years if revenues can be maintained.
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