Medium Term Budget Policy

Summary of the medium-term budget policy statement (MTBPS)

  1. National Treasury revised its GDP forecast to -7.8% in 2020, recovering to real GDP growth of 3.3% in 2021. Economic growth is expected to average 2.1% over the three‐year forecast period.
  2. A combination of expenditure and revenue measures is expected to narrow the main budget deficit from 14.6% of GDP in 2020/21 to 7.3% by 2023/24.
  3. Gross debt is projected to reach 81.8% of GDP in the current year (up from 65.6% projected in February 2020). Gross national debt is projected to stabilise at 95.3% of GDP by 2025/26.
  4. Debt-service costs are projected to increase from R225.9 billion in 2020/21 to R353.1 billion in 2023/24, at an average annual growth rate of 16.1%. Debt-service costs are now 4.8 % of GDP, up from 3.3% in 2016/17.
  5. To assist with the consolidation, government has projected tax increases of R5 billion in 2021/22.
  6. Revenue forecasts for 2020/21 were revised down (tax revenue in the current year is projected to be R8.7 billion lower than the June estimate).
  7. Funding for the large state-owned enterprises will continue. The Minister announced that South African Airways (SAA) is allocated R10.5 billion in 2020/21 for its business rescue plan, while the Land Bank’s restructuring will require R7 billion over 2021/22 to 2023/24.

Key take outs

Downward revisions to nominal GDP have pushed up the budget deficit and debt-to-GDP ratio. The revised public debt trajectory is much worse than the ‘active scenario’ presented in the June 2020 Supplementary Budget, however, it is still not quite as dire as the ‘passive scenario’.

The peak of the debt-to-GDP ratio is higher at 95.3% in 2025/26, but the ratio is projected to remain below 100% over the forecast period.

The graph below plots the three possible roadmaps – the yellow graph (2020 MTBS) is now the one projected by government.

Stabilising debt is likely to prove difficult, with short-term costs for the economy and the fiscus. To partially offset the effect of the spending adjustment, the government has weighted the largest share of reductions to the wage bill whilst still committing to continue to support capital grants and the Infrastructure Fund. Government has proposed growth in the public-service wage bill of 1.8% in the current year and average annual growth of 0.8% over the 2021 MTEF period. To achieve these targets, government has not implemented the third year of the 2018 wage agreement.

The chart below shows the annual average growth rate in government expenditure items for 2020/21 to 2023/24 as tabled in the MTBPS. Debt service costs remain the fastest growing expenditure item, consuming 21 cents of every rand of the main budget revenue.

Debt service costs are rising and have been funded from additional borrowing.

Furthermore, these interest payments are absorbing a growing share of limited public resources, which increasingly crowds out spending on social and economic investment.

What to watch going forward 

  1. Risks to the growth outlook
    The main risks to the economic outlook include: weaker-than-expected growth, the continued deterioration in the public finances, a failure to implement structural reforms and a second wave of COVID-19 infections, accompanied by new restrictions on economic activity.
  2. Implementation risk
    There is significant implementation risk to the proposed spending reductions on the public sector wage bill. This is coming largely from the powerful public sector trade unions and other organised labour movements. The unions have taken the wage dispute to the labour court, opposing the government’s refusal to implement on agreed wage increases this year.
  3. Increasing funding costs
    In the current year, government’s financing costs have been largely driven by concerns about low growth and fiscal weakness. Higher financing costs of new debt will result in a rapidly increasing level of debt servicing costs. Overall the fiscal trajectory is a major source of uncertainty – this in turn results in higher borrowing costs for the private sector and broader economy. This in turn negatively affects direct capital investment projects.
  4. South Africa’s credit rating
    A deterioration of the fiscal deficit is negative for SA’s credit rating. The continued concern towards the proposed restructuring of state-owned enterprises, including Eskom, SAA, SABC and Denel, and the lack of detail on government expenditure reduction may undermine the credibility of the proposals. SA’s growth and fiscal challenges may prompt rating agency S&P to lower SA’s sovereign rating outlook to negative from stable in the November 2020 credit ratings review.
  5. State-owned companies
    State-owned companies continue to present significant fiscal risks in the form of contingent liabilities and direct requests for state financial support. COVID-19 and the associated restrictions on economic activity have increased the financial pressures that these businesses face.
  6. Changes in government alignment
    We need to see the state’s fight against corruption continue and those guilty of state capture and financial mismanagement brought to book. This will help build confidence that the government will be able to implement the tight fiscal discipline that is required. Major warning signs would be a change in Finance Minister or shifting positions on monetary policy from the Reserve Bank.

We hope that you find this document useful. We find ourselves at a critical point in the journey our country has taken over the past 20 years. Sound financial management is now critical for us to get the economy back on a path of economic prosperity.

Written by Nedgroup Investments.

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