Article

Budget Speech - No room to manoeuvre

Published: 03 February 2022

In the 2021 Medium-Term Budget Policy Statement, Finance Minister, Enoch Godongawa, stressed the need to consolidate the small gains attained in the recovery of the economy from the devastation brought about by the pandemic, while adopting a cautious and restrained approach to public spending in the medium term. Buoyed by the resurgence of the global economy in the first half of 2021/22 on the back of growing global demand for commodities - real GDP is forecast to grow by 5.1% in 2021. Output is expected to return to pre-pandemic levels in 2022. The South African economy grew faster than anticipated in the first half of the 2021 financial year though some of these gains were eroded by the episodes of public unrest in July 2021, the onset of the third wave of the COVID-19 outbreak, and the pervasive structural constraints in the domestic economy such as inadequate energy supply.

The Finance Minister explained that government’s fiscal consolidation agenda, which is to be realised through restrained spending, is driven primarily by the need to reduce the budget deficit and stabilising debt-to-GDP ratio. With little fiscal room available to government, it is expected that we will see changes to spending that will be driven by the reprioritisation and review of current government programmes. Key focus areas the Finance Minister is likely to provide significant resources to in the upcoming budget will include:

Addressing rising debt

National debt is projected to be R4 trillion. Debt service costs are expected to be the largest portion of spending for the upcoming budget. In part government’s increasing expenditure and dwindling tax revenues further exacerbate the crisis. The rising debt-service costs are expected to be in excess of R1 trillion over the Medium-Term Expenditure Framework (MTEF). As a consequences of these high debt costs individual service delivery areas are negatively impacted.

Increased fiscal allocation to service debt will crowd out spending in other service delivery functions, which in turn will impact the provision of basic services. 

Narrowing the budget deficit

The minister must reflect on the plans to narrow the government’s primary budget deficit in the next two years towards the end of the sixth administration’s tenure in office, which ends in 2024.  Looking beyond the next two years, and taking the usual three-year MTEF view, won’t be helpful as government would have changed hands to the seventh administration, even if it is still a government of the current ruling party.  The major question to address is whether it is possible to achieve a budget surplus or narrow the deficit to acceptable levels by the time the 6th administration completes its tenure.

Public sector wage bill

The public sector wage bill still accounts for 35% of the overall national budget. National Treasury has recently instituted a national wage bill freeze and indications are that this will continue into the new financial year. The 2021 wage agreement provides for a pensionable increase of 1.5%, as provided for in the 2021 Budget. This includes a once-off non-pensionable cash gratuity of R1,000 after-tax per person per month. This gratuity payment is expected to cost the government R20.5 billion in 2022/23. There is still uncertainty over the legal dispute pertaining to the 2018 wage bill agreement. Should government lose the dispute, there might be a requirement for the state to implement the agreement retroactively putting huge demand on the fiscus. Government might be compelled to reprioritise funding and/or borrow funds in order to do this.

State-owned company (SOC) support

The poor financial position and deficiencies in the operations of most SOCs remains a large contingent risk. It is possible that a number of these might require bailouts from the state, notwithstanding the fact that there is no additional support identified in the fiscal framework. A recent review of SOCs by the National Treasury suggests that the worst is not yet over for these companies. In all probability, the Finance Minister will announce further bailouts to support these SOCs.

The Minister of Finance must look beyond financial support for the SOCs and include managerial and governance capacity as well as competency to deliver on the mandates of these entities. The inability to manage and govern these entities is also at the heart of their non-performance.

Basic Income Grant

This has become a pertinent issue in recent times with a number of interest groups calling for the introduction of a basic income grant. National Treasury has, however, not made any pronouncements on this and has called for further research on this. With the social protection grants accounting for nearly 14% of all government spend, it looks unlikely that the Finance Minister can find any space in the current fiscal framework to introduce another social grant - it would simply be unaffordable. Any such consideration would mean that certain programmes would have to be reprioritised and or discarded.

The Finance Minister is faced with many fiscal considerations in the upcoming budget. Lower growth in the economy suggests that we will likely not see a resurgence in the domestic economy to pre-COVID levels. This is not enough to offset the various economic challenges currently faced in the country though. Sluggish growth and high unemployment rates continue to constrain the economy. Fiscal policy will for the foreseeable future continue to focus on reeling in and consolidating government spending in order to reign in growing government debt.

The Finance Minister must task National Treasury and the government with re-building the small micro and medium enterprise (SMME) sector as an important backbone of the economy for growth, which will lead to employment where people live. Focus must be given to secondary manufacturing, agro-processing and mineral beneficiation, technology and artisanship with a feeder from Further Education and Training colleges. This Budget Speech is more of a National Treasury “Growth Agenda” and not only an economic development discussion in the economic cluster.

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