The budget-balancing act takes centre stage

Economists have projected a better-than-expected budget deficit as Finance Minister Tito Mboweni prepares to update the country on the state of the fiscus. Most will be looking towards how the government will strike a balance between narrowing the deficit further and stimulating the economy.

Last year, the national treasury forecast that the country’s budget deficit would reach 15.7% of its GDP in the 2020-21 financial year. This was due to the blow to the government’s revenue caused by the Covid-19 economic crisis.

Slightly stronger economic growth and better-than-expected tax collections mean that the deficit will likely be lower, economists predict. 

The Bureau of Economic Research (BER) expects the 2020-21 budget deficit to be between 11.5% and 13% of GDP. This is in line with other forecasts: Nedbank economists expect the deficit will be 12.9% of GDP, while FNB has put the deficit between 11% and 12.5%.

Debt

However, the BER warns, better deficit projections still push government debt towards 80% of GDP. 

High debt levels mean higher debt servicing costs, which further reduces revenue that could be spent elsewhere. Debt-service cost is the fastest-growing expenditure item and is expected to grow by 13.8% year on year in 2020-21. This will put the debt-service cost at R28.3-billion higher than in 2019-20.

FNB agrees that debt would be slightly lower than the 81.8% of GDP projected by the treasury last year. Debt stabilisation depends on a swift vaccine roll-out and effective economic reforms, FNB said last week.

The wage bill 

Expenditure reductions and tax increases would be necessary to stabilise government debt.

Analysts at PricewaterhouseCoopers (PwC) expect that budget expenditure will be trimmed at the margins and reprioritised towards medical and other appropriate and necessary social spending. 

Mboweni will likely restate the government’s commitment to reducing the public sector wage bill, PwC said in its budget predictions. 

But, the PwC analysts added: “Despite pressures on the government to source funding for a Covid-19 vaccination programme, it is unlikely that any expenditure already promised for SOEs [state-owned entities] will be reallocated for this purpose.”

Economists agree that containing the public sector wage bill is desperately needed to achieve fiscal balance. 

One of the drivers behind the country’s narrower budget deficit was the treasury’s ability — because of a labour appeal court ruling — to continue reneging on the 2020 salary adjustment that was part of the 2018 public sector wage agreement. The estimated cost of this saving was R37-billion or 0.8% of GDP.

Cosatu has hit out against the wage bill cuts by disputing the extent of its burden on the fiscus. In its budget expectations, the trade union federation says the government needs to respect collective bargaining by removing the imposed wage freeze. 

Taxes 

At the top of ordinary South Africans’ minds is how the Covid-19 crisis, and efforts to emerge out of it, will affect taxes.

Earlier this year, treasury director general Dondo Mogajane told Business Day his department was considering several options to fund the Covid-19 vaccine, including raising taxes. At the time, the treasury would not be drawn for further information.

Last week, Liberty economist Tendani Mantshimuli said higher tax rates would bolster the government’s revenue to finance the necessary expenditure without incurring debt. 

Last June, it was proposed in the supplementary budget review that taxes would increase by R5-billion in 2020-2021.

But revenue collections between October and December 2020 were surprisingly resilient across all tax types, PwC notes. This affords the national treasury a degree of flexibility “and should have the effect of reducing the pressure to raise taxes”.

In light of this, PwC expects that the proposed tax increases will no longer be introduced. FNB agrees that it is unlikely taxes will be increased. 

“Instead, the government should continue focusing on spending reprioritisation, improving tax collection efficiency and swiftly implementing growth-enhancing economic reforms.”

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