No room for error in proposed slower fiscal consolidation path

Finance Minister Tito Mboweni has warned that South Africa cannot allow its recent fiscal weakness and the pandemic to turn into a sovereign debt crisis, and the measures in the Medium-Term Budget Policy Statement (MTBPS) set out active measures to avoid this risk.

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Mboweni said on Wednesday that he was tabling a five-year fiscal consolidation that promotes economic growth while bringing debt under control.

The South African economy is expected to recover to real GDP growth of 3.3% in 2021 and grow by 1.7% in 2022 and 1.5% in 2023. But based on this projection, the MTBPS said the economy will only recover to 2019 levels in 2024.

However, Mboweni said if the country put all its efforts into implementing the Economic Reconstruction and Recovery Plan, economic growth can accelerate to 3% or more.

“This will secure fiscal sustainability and build this economy better than before,” he said.

The weaker economic outlook is expected to result in tax revenue declining by 8.7% or R313 billion from the estimate released in June 2020.

Government has projected tax increases of R5 billion in 2021/22, R10 billion in 2022/23, R10 billion in 2023/24 and R15 billion in 2024/25. The revised main budget deficit is now expected to be R707.8 billion, a little better than the Special Adjustments Budget, but it is unchanged as a ratio of GDP at 14.6%.

However, the medium-term fiscal strategy narrows the main budget primary deficit from an expected R266 billion in 2021/22 to R84 billion in 2023/24 and aims to reach a main budget primary surplus by 2025/26.This target is expected to result in debt stabilising at 95.3% of GDP in the same year, the MTBPS said.

Mboweni stressed that South Africa cannot sustain its current levels of debt. “We must now rally behind fiscal rehabilitation and growth. Right now, government is borrowing at a rate of R2.1 billion a day.

“We must be careful to avoid the fate of countries like Argentina and Ecuador that defaulted on their debt this year. Countries that find themselves in default see sharp GDP contractions and currency depreciations,” he said.

The MTBPS said debt-service costs are the fastest-growing item of spending over the medium term.

Mboweni announced main budget non‐interest spending cuts totalling R300 billion for the period between 2021 and 2024.

He stressed that as part of South Africa’s post-lockdown rehabilitation, the country needed to forge a new consensus on public-sector employee compensation.

“Our compatriots in the private sector have made sacrifices and even negotiated salary cuts to keep businesses afloat. Over the past five years, public sector employee compensation grew by 7.2% a year on average – well above inflation. Over the next five years, it will need to grow much, much slower,” he said.

The MTBPS said the real cost of the public-service wage bill has risen by 51 per cent since 2008 and with much state borrowing funding consumption, “the wage-setting process has become divorced from economic reality”.

Mboweni added that government will act to instil confidence among discouraged work seekers, businesses bruised by lockdown and facing uncertainty, farmers and farm workers who produce the food for the country, and the country’s international partners who know that South Africa is a great place to invest.

Among other things, Mboweni said that government would:

  • Make it easier to do business by removing the needlessly complex red tape that increases the cost of doing business.
  • Create stable and predictable policies to ensure a universal understanding of government’s policy trajectory, stressing it is not only investors that need confidence but also the average South African.

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