Lullu Krugel | Partner and Chief Economist | PwC’s Strategy& | mail me |
Dr Christie Viljoen | Economist | PwC’s Strategy& | mail me |
Minister of Finance Tito Mboweni delivered his Budget Speech 2021 to Parliament on Wednesday, February 24.
This document provides an overview of key information relating to the economic outlook, government revenue and expenditure, fiscal balance, and the public debt trajectory.
Economic growth forecasts underpinned by a successful vaccine rollout
Under its baseline scenario, the National Treasury expects the economy to grow by 3.3% this year, and for economic activity to return to pre-pandemic levels by the latter part of 2023. Budget documents have in past been more optimistic about economic growth forecasts compared to those of many economists working in the private sector. However, this time round, the 3.3% figure is below the Bloomberg survey median (3.5%). PwC’s estimate of 3.4% is also lower, thought this is attributed to base effects from our 2020 recession estimate being slightly larger than many other predictions.
Officials are clearly pinning their hopes on a successful roll-out of the COVID-19 vaccine: ‘A successful vaccine rollout is likely to boost domestic economic growth, enabling renewed trade and releasing pent-up demand. Conversely, a slow, stuttering rollout poses the most significant threat to economic recovery,’ commented the Budget Review 2021.
The National Treasury’s downside scenario warns of another economic recession should a third and fourth wave of COVID-19 infections hit the country, with the vaccine rollout only gaining traction in 2022.
Figure 1: Real GDP growth (%)
Sources: PwC, National Treasury, South African Reserve Bank (SARB)
Budget Review 2021 also warned of the risks posed by Eskom to the economic outlook. Even in the depths of the 2020 recession, the power utility was unable to guarantee a sufficient supply of power to the country. As the economy recovers, and demand for power grows, Eskom supply will remain under pressure. Despite the ramp-up of its maintenance plan, real improvements in generation reliability are only expected from September this year.
Lifting business and consumer confidence to boost business confidence
Many people looked at the finance minister’s speech for inspiration; for some encouragement that 2021 will be a better year. In our report ‘South Africa’s economic outlook: What can Budget 2021 do to help?‘ released last week, we identified seven factors that the finance minister could comment on that would support business and consumer confidence.
The Budget Review 2021 made the following comments on these points – speaking to three out of the seven factors:
- Update on structural reforms under Operation Vulindlela – encouraging updates were provided on speeding up the expansion of electricity generation; employment creation; infrastructure development as well as support for manufacturing, localisation and beneficiation.
- Cheap working capital loans for start-ups – no comment.
- Progress in securing private investment for the state’s Investment Fund – the pipeline of projects has not yet been approved for public funding, so it does not appear that private money has been committed.
- Success in allocating 40% of public procurement for women – no comment.
- Potential increases in personal income tax rates – previously announced increases amounting to R40 billion over the next four years have been withdrawn.
- Suggested basic income grant – no comment.
- Extension of R350 Special COVID-19 grant – no comment.
Revenue collections will be better than previously forecast
The minister cautioned that “an incorrect notion has taken hold that government is swimming in cash”. However, he did admit that the fiscus is in a better place compared to when he delivered the MTBPS 2020 in October. Revenue collections were above expectations during the fourth quarter of 2020, with a particularly strong performance in corporate tax receipts on the back of larger payments from the mining industry.
PwC expected tax income in the current year to be between R100 billion and R108 billion higher than forecast in the Medium-Term Budget Policy Statement (MTBPS): The National Treasury has put the number at R99.6 billion. The better-than-expected tax performance over the past several months, and expectations of this positive outturn continuing in the short term, was anticipated to allow the finance minister leeway to avoid tax rates. MTBPS 2020 suggest that tax increases would be needed to collect an additional R5 billion in the 2021/2022 fiscal year – this amount will now be more than covered by the current outperformance in tax receipts.
On this basis, the finance minister avoided the need to lift income tax rates both now and over the medium term. Minister Mboweni was even able to make good on an earlier pledge to lower company taxes. The corporate tax rate is being reduced by one percentage point to 27% from next year. The step will, however, be revenue neutral, with adjustments to the handling of interest deductions and assessed losses making up for this from a revenue perspective. Further deductions in the corporate tax rate is possible in the future.
Of course, this favourable situation did not change plans for the annual increase in excise duties on tobacco and alcohol products. Both these have seen a steady above-inflation increase in recent years, and 2021/2022 will not be an exception: both will increase by 8.0%. The finance minister commented that excessive alcohol consumption can lead to negative social and health outcomes and that consumers do react to price increases; i.e. higher prices should lead to lower consumption of alcohol products.
Expenditure: zero-based budgeting starting in 2022/2023
Despite a planned sharp reduction over the medium term in the size of the fiscal budget, Minister Mboweni does not see his budget as one of austerity. In fact, he sees it as growth-stimulating and supportive of the Economic Reconstruction and Recovery Plan on the basis that investment spending will be the fastest growing component of expenditure.
After budgeting R1.9 billion in vaccine spending in the current fiscal year, a total of R9 billion has been set aside over the medium term for the COVID-19 vaccine rollout. This includes R6.5 billion for procurement and distribution of vaccines. Provincial health departments are allocated R2.4 billion to administer the vaccines. PwC believes that some of this funding will come from the general government revenue pool while private medical schemes are also expected to make contributions – likely paying more for their members’ jabs in order to subsidise uninsured individuals.
National Treasury admits that there is great uncertainty over the total cost of the vaccine campaign, an sees room for up to R19.3 billion in spending. Additional funds would come from the contingency reserve and emergency allocations.
Budget 2021 again pledge to implement zero-based budgeting in the near future. This process involves building departmental budgets from scratch instead of just taking the previous year’s numbers and adjusting these for inflation and other needs. In essence, zero-based budgeting requires the justification of all expenditure by doing a full review of spending plans – and not just keeping programs on the go because they were important in the past. The National Treasury and Department of Public Enterprises will be first to pilot a new budgeting methodology with an aim of significantly reducing budgets by 2022/2023.
Good news: a smaller-than-expected fiscal deficit
The projected budget balance for this year and the rest of the medium term is better than economists expected. The current (2020/2021) financial year is expected to see a revenue shortfall equal to 14.0% of GDP compared to an estimate of 15.7% of GDP released in October. For the coming (2021/2022) financial year, the projected shortfall of 9.3% of GDP is also small than economists expected, based on a figure of 10.1% of GDP from the Bloomberg survey.
However, while this is good news, a word of caution is important. Budget Review 2021 makes it clear that fiscal consolidation is a priority and that the state will use the better-than-expected revenue situation to reduce the size of the fiscal deficit .However, the aim to reduce the deficit has been in every budget speech over the past decade. And results have been disappointing. South Africa has been unable to perform close to its annual pledges for fiscal consolidation due to a lack of thriftiness as well as over-optimism about revenue prospects.
Figure 2: Budget balance (% of GDP)
Sources: National Treasury, Bloomberg
On a positive note, the finance minister again pledged to move the primary balance to a surplus by 2024/2025 – only 35% of economists surveyed by Bloomberg ahead of the speech see this as possible. The primary balance represents revenue and expenditure excluding interest payments on consolidated government liabilities.
Public debt
The improvement in deficit projections will have a significant positive impact on the public debt trajectory. Budget Review 2021 is pledging to stabilise public debt at 88.9% of GDP in 2025/2026. This is, as the minister also noted, a significant improvement on the numbers presented in MTBPS 2020. It also brings the current debt trajectory very close to the “active scenario” of deficit and debt management suggested in the Supplementary Budget 2020.
Figure 3: Gross public debt (% of GDP)
Source: National Treasury
