Commodities boom boosts tax revenue but it could be short-lived
A commodities boom has seen government collecting R120bn more in tax revenue than previously projected, helping to push economic growth to 5.1% in 2021, up from a 6.4% contraction in 2020.
Despite the surprising rebound, the economy remains at risk as a result of load-shedding, rising public sector debt and the slow pace of implementing economic reforms. These are key contributing factors to growth shrinking to a projected 1.8% in 2022/23 and 1.6% in 2023/24.
In a review of the medium-term budget policy statement (MTBPS), the National Treasury is warning that while the global demand for commodities has enabled mining to contribute massively to the revenue kitty, the additional money “flatters to deceive” because revenue collection still remains under pressure.
“A surge in commodity prices has significantly improved the in-year revenue outlook, though its effect is likely to be temporary. Revenue collection remains well below pre-pandemic expectations, and in this sense the numbers flatter to deceive. Compared with the 2020 budget projections, revenue is expected to be R284.7bn lower than forecast until 2022/23,” the document said.
Finance minister Enoch Godongwana said in his speech that the budget was about navigating SA out of the economic damage wrought by the coronavirus pandemic through reducing spending, cutting debt and focusing on efforts to grow the economy.
“The MTBPS charts a course that demonstrates government’s unflinching commitment to fiscal sustainability, enabling long-term growth by narrowing the budget deficit and stabilising debt,” he said.
The Treasury cited continued power cuts, the threat of a fourth wave of Covid-19 due to vaccine hesitancy, public-sector wage bill commitments and slow implementation of structural reforms as risks to fiscal consolidation. It has also boldly declared that it will no longer bail out struggling state-owned entities.
The government is now pushing to accelerate the following reforms over the next three years by:
- reducing load-shedding risks by allowing private operators to generate their own electricity up to 100MW;
- starting to auction broadband spectrum by March 2022;
- opening third-party access to the freight rail network by the end of 2022;
- rolling out the eVisa system in March 2022 to promote tourism;
- reviewing the regulations and laws delaying migration of skilled workers; and
- speeding up infrastructure investment.
With debt at R4-trillion, the country is spending more money on servicing existing debt than it does on healthcare, social spending, and peace and securityNational Treasury
As part of fiscal consolidation efforts, the budget deficit (the amount that must be borrowed to plug the gap between revenue and expenditure) will narrow from 7.8% this financial year to 4.9% in 2024/25.
However, high debt levels remain a major concern. With debt at R4-trillion, the country is spending more money on servicing existing debt than it does on healthcare, social spending, and peace and security.
Already taking up 21c of every rand spent, interest on debt will cost SA an aggregated R1-trillion over the next three years. The Treasury said the higher interest paid was as a result of bondholders pricing risks into their premiums.
“Over the past decade, a combination of declining economic growth and rapid debt accumulation has increased SA’s sovereign risk premium. In effect, this means that buyers of government bonds are charging higher rates to compensate for the additional risk associated with investing in SA.”
The government is taking steps to rein in debt, with plans to stabilise it at 71.8% of GDP by 2025/26. Critics have continuously slammed the Treasury for sticking to an austerity budget in the midst of a pandemic, calling on it to spend more to stimulate the economy. But it is sticking to its guns, vowing to cut spending drastically to bring public finances into shape. The R350 social relief of distress grant is coming to an end in March 2022 and a decision to continue it beyond that time frame must be taken by the cabinet.
In the consolidated government expenditure, spending on social development decreases sharply from R399bn in 2021/22 to R321.5bn in 2022/23, recovering slightly to R333.2bn in the outer years of 2024/25, a 5.9% decrease over the medium-term expenditure framework (three-year spending period). It is not clear how much of this reduction is related to the discontinuation of the social relief of distress grant.
Learning and culture remain the biggest spending items at R417.8bn in 2021/22, moderating slightly to R414.3bn in 2022/23 but showing an increase in 2024/25 to R434.8bn.