The 2021 budget was not a disaster budget.
It was ugly, but it suggests that South Africa’s financial position has not deteriorated as much as was foreseen in October last year in the Medium Term Budget Policy Statement (MTBPS) presented by finance minister Tito Mboweni.
The budget is very ambitious, and a confident Mboweni convinced many economists, analysts, journalists and the markets that the government has a plan to rescue the sinking fiscal ship. The key to this near-miracle rescue will be whether the government can stick to the budget and turn the promises of reduced spending, especially on the public wage bill, into action.
Unfortunately, as explained below, the government is not very good at sticking to the budget.
Our budgets are mostly overly optimistic about future prospects. If history repeats itself with the 2021 budget and forecasts, SA’s fiscal position may deteriorate much more than Mboweni predicted.
South Africans need to be acutely aware that the country finds itself in a desperate fiscal position. It may be better than expected, but without intensive care treatment, we will stand cap in hand before the IMF and World Bank in the not too distant future.
The budget deficit for the current financial year will be 14% of GDP. The actual amount is R690 billion, a bloodcurdling sum.
It is the largest ever deficit in SA’s history, both as a percentage of GDP and the actual amount. (In fact, the deficit is larger than the total revenue Pravin Gordhan announced in the 2010 budget.)
The deficit is, of course funded by debt, and at the end of the year, public debt will be a few billion short of R4 trillion, or 80% of a shrinking GDP.
We can get out of this hole
Mboweni is optimistic that SA could get out of this hole, albeit with incredible difficulty. He confidently stated that National Treasury (NT) foresees that the implementation of the budget will reduce the current deficit of 14% of GDP to 9% in the 2021/22 fiscal year and 7.3% and 6.3% in the two subsequent years.
In the Budget Review document, the NT goes further and states: “Government’s fiscal strategy puts South Africa on course to achieve a sufficiently large primary surplus to stabilise debt…. Debt is now expected to stabilise at 88.9% of GDP in 2025/26. Over time, debt stabilisation will reduce borrowing costs and the cost of capital, attracting investment that can support the economy.” (My emphasis)
This is a bold statement. South Africa had only achieved a budget surplus in 2007, and it flowed from a booming economy that expanded by nearly 6% that year.
The thick blue line represents the actual budget deficit between 2011 and 2022. The coloured lines represent National Treasury’s three-year forecasts as disclosed in budget documentation. Due to Covid-19 and the devastating effect on the economy last year, the forecasts published in the February 2020 budget were academic. The forecasts used in the graph for the 2020/21 year are based on the amended 2020 budget published in October last year.
Can the government stick to the budget?
This is the big question. But with 20/20 hindsight, the probability is low.
The graph above may look a bit complicated, but it isn’t. The thick blue line represents the actual budget deficit as a percentage of GDP for the ten years between 2011 and 2021. The deficit fluctuated between 3% and 4.5% until 2019, before it started to fall off a cliff.
The coloured lines represent NT’s forecasts during this period. Every budget includes forecasts for the following three years for a range of indicators: the budget deficit – probably the most important of them all.
This analysis shows the accuracy of the forecasts. If the coloured lines (forecasts) are close to the blue line, the estimates were relatively accurate. Conversely, if the coloured lines are not near the blue line, the estimates are inaccurate. The further the distance from the blue line, the more inaccurate the forecasts were.
The graph shows that the forecasts NT made up to 2014 were relatively accurate and, in some cases, more conservative than the eventual outcome. For example, NT forecasted in 2011 that the deficit in 2012 would be 5.3% when the actual deficit in 2012 came in at 3.6%.
However, since 2015 the forecasts have become less accurate. A lot less accurate. For example. In 2017 the deficit was -3.6%, and NT forecasted it would improve to 2.6% in 2020 (pre-Covid). However, in 2020 the actual deficit was -6.3%.
To be fair, a forecast is merely a prediction of what may happen in future and it is based on many assumptions, which in South Africa is at the best of times complicated.
The best way to look at these forecasts is not to look critically at the actual numbers, but instead at the trend – i.e. does NT expect the deficit to rise or fall over the next few years? In many ways, the perceived future direction is much important than the actual values. Over the past few years, NT did not even get that right.
Treasury is overly positive
The graph above clearly shows that NT’s forecasts since 2015 have been overly optimistic. The forecasts suggested a steady improvement in deficits, while reality saw a steady decline.
NT’s latest forecasts for the next three fiscal years should be seen in this context.
NT expects the 14% deficit to decrease to more than half to 6.3% in 2024.
These forecasts were undoubtedly based on many assumptions. Most notably, a significant increase in tax collection and a substantial cut in government spending.
Based on the overly optimistic forecasts of NT in recent years, we should not hold our breath. There remains a wild fiscal ride ahead. But hopefully, NT at least got the trend right.