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Anchor’s 2021 Budget wish list

23 February 2021

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by Casey Delport, Investment Analyst

Finance Minister Tito Mboweni will table government’s 2021/2022 National Budget in Parliament on Wednesday (24 February). This is arguably the most important and difficult budget since the dawn of democracy in 1994. Commentators and political parties are already urging Mboweni to find the right balancing act and show a commitment to curb spending and rein in debt, instead of raising taxes on an already overburdened consumer. SA is in the precarious position of being hit by a twofold setback – the COVID-19 pandemic arrived in the country as SA was already struggling with a recession and a hamstrung President Cyril Ramaphosa administration, after years of maladministration under ex-President Jacob Zuma’s administration.

However, on a positive note, since October 2020, cumulative tax revenue collections have performed better than expected, relative to National Treasury’s (NT’s) Medium Term Budget Policy Statement (MTBPS) expectations. Recent South African Revenue Service (SARS) data show that tax collection in SA has outperformed both the government’s and economists’ forecasts significantly to the end of December 2020, with value-added tax (VAT), company and personal tax, performing strongly. For the SA government’s fiscal YTD (i.e., April to December 2020), tax collections also point to a 10.6% YoY decline in total tax revenue for FY20/21, better than the MTBPS’ forecast for a total tax revenue decline of 17.9% YoY. This better-than-expected performance was broad-based, with all major tax categories now expected to outperform government’s previous forecasts. Therefore, looking ahead to this year’s budget, this revenue overrun should theoretically create enough room for NT to easily absorb the probable state spending on COVID-19 vaccines (estimated at around R20bn), a reasonable degree of state-owned enterprises (SOE) support, and increased social relief, without the need to increase tax rates or incur further fiscal deterioration.

Nevertheless, despite the improvement in the near-term fiscal outlook, issues of debt sustainability continue to linger as the primary balance is projected to remain in a deficit, while the interest rate on government debt is expected to remain higher than nominal GDP – implying that the debt-to-GDP trajectory will continue to rise. As a result, increasing debt service costs are adding further pressure to an already strained fiscus. Thus, a degree of caution is still warranted although the positives stemming from the better-than-expected revenue collection will assist in mitigating the many downward risks still present but will not negate the risks currently facing government. These range from persistent downside growth risks (in the near term, from pandemic-related risks and, in the longer term, from stalling growth reforms), to renewed spending pressure (from higher unemployment and the worsening finances of SOEs and sub-national spheres of government). There is also the still obvious execution risk to implement government’s aggressive proposal to freeze the wages of government employees during the forecast period.

Amidst all these risks, and in anticipation of the upcoming tabling of the budget, the points highlighted below form part of our wish list, or set of ideals, from this week’s budget:

  1. No material tax hikes: This has been the mantra for several weeks now from civil society organisations, commentators, the main opposition DA, as well as other political parties such as the IFP and the ACDP.
  2. The continued reprioritisation of spending away from less urgent areas.
  3. Making public, the further detail surrounding government’s efforts to ‘clean up’ Eskom and its debt burden, which remains a notable risk until a permanent solution has been implemented.
  4. Further details surrounding potential liabilities of the Road Accident Fund (RAF), as well as other smaller SOEs, which are currently in distress, such as Denel, The Land Bank, The South African National Roads Agency (SANRAL), etc.
  5. Detailed plans to address the financial distress of municipalities around the country.
  6. Further clarity around government’s efforts to curb the wage bill. The debate has clearly shifted from the habitual high-single-digit increases to low, if any, aggregate wage growth and we have been positively surprised at government’s resolve to embark on this battle to reduce its wage bill and the fact that it has been prepared to go to court against the labour unions. The tough decisions seem to have been made, although the outcome will only be known once the Constitutional Court case has been heard and wage negotiations for the next three years is complete. We can expect an active strike season in 2021, as government engages in a battle with the unions which it cannot afford to lose.
  7. The phasing in of savings from the planned zero-based budgeting.
  8. The consolidation of entities and regulatory agencies.
  9. The effective management of benefits received by political office bearers through Ministerial Handbook reforms.
  10. Clarity surrounding the funding of the recently announced three-month extension of the COVID-19 relief-of-distress grant.
  11. No budget reduction for the National Prosecuting Authority (NPA) or, better yet, allocating more money to the NPA, and the Special Investigating Unit (SIU) to fight rampant corruption.
  12. The presentation of feasible growth targets that reflect the current economic reality of the country.

Whether any of the abovementioned items on our wish list will indeed come to fruition remains to be seen. There are also plenty of other fiscal-related issues that need to be addressed and this list is by no means exhaustive. The extent to which new spending absorbs any fiscal windfall is crucial as it would reflect the true commitment of government to fiscal consolidation. Naturally, the extension of pro-poor relief (i.e. the additional grants) is imperative, especially given the latest extension of lockdown restrictions and the severe pressure currently being faced by low-income households.

Positively, the revenue overshoot means that this can be accommodated without fiscal slippage relative to the latest forecasts. Overall, however, SA’s fiscal situation remains precarious and the debt service burden is unsustainable, so striking the right balance between providing relief and improving the fiscal prognosis of the country will be imperative in this year’s budget.

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