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Continued commitment to unflinching fiscal consolidation and policy reform remain critical requirements from upcoming Budget, amid fragile growth environment

22 February 2022 Old Mutual Investment Group

Continued commitment to ‘unflinching’ fiscal consolidation, as outlined in November’s Medium-term Budget Policy Statement (MTBPS), as well as crucial economic policy reform remain key levers to avoiding significant fiscal risk further down the lines, says Old Mutual Investment Group Chief Economist, Johann Els.

Outlining his expectations from tomorrow’s Budget, Els highlighted that it will be measured against November’s MTBPS and the positive message that came out of this, including the highlighting that delaying structural reform implementation is a significant risk and the urgent need for a resolute commitment to fiscal consolidation based on strong expenditure control, containing wage bill growth and further expansion to social security based on a deficit-neutral approach. “Any weakening of this message will be a huge disappointment and any slippage will be punished by the markets,” he warned.

Yet, the backdrop for this year’s Budget offers a positive environment. Els points to the dismal situation that we have come from, even before the impact of the Covid-19 pandemic. “With the arrival of the pandemic Covid lockdowns hit revenue hard and lifted expenditure sharply. But we also had a case of very conservative budgeting by Treasury at that stage, amid significant uncertainty,” he says.

“More recently, we saw the very strong V-shaped recovery scenario play out, as well as solid global support through very supportive terms of trade from rising commodity prices,” he adds. “Consequently, better medium-term growth prospects will further help to reduce fiscal risks.”

Therefore, according to Els this will be a market-friendly budget. “We anticipate that the current fiscal year outcome for 2021/2022 will be even better than the MTBPS, with fiscal consolidation and reform at the top of Treasury’s agenda,” he explains. “I think we’ll see continued emphasis on controlling the public sector wage bill and some tough love for SOEs, with no transfer of Eskom’s debt.

“Tax hikes are unlikely from this Budget and I don’t anticipate an announcement on the Basic Income Grant (BIG). If anything, we should see further extensions and even expansion of the Covid income grant,” he added. “Lastly, a primary surplus by 2024/2025 could very likely be achieved as per Treasury’s goal and we’re going to see further evidence of a credit ratings trough.”

Els conservatively expects a total revenue overrun of R175 billion compared to the Budget in February 2021, which is R46 billion above MTBPS estimates. “Further revenue outperformance over the Medium-term Expenditure Framework (MTEF) is also likely,” he says. “I’ve estimated a Budget deficit ratio for the 2021/2022 Budget of -6.1%, but I don’t anticipate the 2022/2023 deficit to be much smaller than that given that the current revenue outperformance isn’t expected to continue.”

Much attention has been focused on the prospect of a Basic Income Grant, following increasing pressure and political support for this. Els is of the view that this is clearly not affordable. “The Minister of Finance is not supportive of BIG, but the question is whether Treasury will be able to withstand the pressure,” he says. “Compromise might be the only solution and, in this scenario, we probably won’t see BIG, but rather some form of better social protection.

“Therefore, while it’s not clear if a decision of BIG has been made, excess revenue means that we’ll likely see further extensions of the Covid grant. Perhaps they’ll extend to more recipients – 11 or 12 million compared to the current 9.5 million. It might also be politically advantageous to keep offering temporary extensions. Either way, there’s room for some sort of quid pro quo, with more spending leading to faster or more meaningful policy reform,” he concludes.

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