The success of this year’s budget will depend on whether government can make true on its expenditure cuts announced on Wednesday.
South Africa is currently spending R2.1 billion a day on servicing its debt and our public service wage bill as percentage of gross domestic product (GDP) is the third highest in the world, slightly behind wealthy countries such as Denmark and Norway.
Nicky Weimar, chief economist at Nedbank, says SA still has a “horrific” budget deficit (14%) despite the better-than-expected tax collections from October onwards.
Government is quite ambitious with a projected deficit of 9.3% next year, 7.3% in 2022/23 and 6.3% in 2023/24.
“We are miles away from a sustainable deficit level. As a rule, you do not want your budget deficit to exceed 3% of GDP. If you allow yourself to run a deficit of more than 3% your debt is escalating at a non-sustainable pace and the debt service costs start to run away.”
Debt service costs
Michael Hewson, director at Graphene Economics, says the country’s debt service costs are currently the fastest growing expenditure item in the medium term.
“Our current debt levels are constraining us from considerable stimulus opportunities,” he said during a post-budget webinar hosted by law firm Bowmans.
Weimar foresees that debt service costs will explode given the fact that efforts to contain the deficit will not bring us near a sustainable level of 3% in the foreseeable future.
“It is going to gobble up 21% of tax revenue by the time we get to 2023/24. This is a monster. We are not comparing well with other emerging markets in terms of the debt service costs as a percentage of revenue. We are looking quite ugly.”
The only countries looking worse are the Dominican Republic, India, Pakistan, Egypt and Sri Lanka.
Weimar says government is really counting on revenue collections to bounce back. Revenue collection in 2020 was down by 11%, slightly better than the expected 15.9% forecast in October. It is expected to grow again by 11.6% in 2021/22 to R1.52 trillion against projected expenditure of R2 trillion.
She says the revenue forecasts are realistic, and perhaps even on the conservative side. There will be some “normalisation” this year and some of the tax deferrals granted to businesses to assist cash flows in 2020 will end up in the tax net this year.
Weimar says the budget has to a large extend been tax neutral. Taxpayers are getting bracket creep relief of R2.2 billion. However, government expects to collect R2.2 billion from the 8% increase in the excise duties of alcohol and tobacco products.
It will also collect an additional R400 million from a newly introduced tax on the export of scrap metal. “They will be looking for these exotic things to tax. They will be inventing products to tax,” she adds, perhaps tongue-in-cheek, perhaps not.
To illustrate how quickly things can change Graphene Economics compiled this table.
|1 February 2020||1 February 2021|
|Covid-19 confirmed deaths||310||2 250 217|
|Value of Bitcoin||$9 384||$35 524|
|Elon Musk’s approximate net worth||$28 billion||$183 billion|
|Netflix subscribers||167 million||203.7 million|
|Collective rainfall in SA||193 ml||1,001 ml|
Finance Minister Tito Mboweni announced a cut of 1.6% in government expenditure for this year. That is in nominal terms, says Weimar. The cut in real (inflation adjusted) terms is almost 5%.
“That has never been done by this government before,” she says. Currently the compensation of civil servants and debt service costs makes up almost 50% of all government expenditure.
One of the biggest unknowns is whether government will be able to defeat trade unions in future wage negotiations. But there is certainly a strong case to make for salary cuts in the civil service.
South Africa’s compensation of state employees as a percentage of gross domestic product is 14.8%. The average in member states of the Organisation of Economic Cooperation and Development (OECD) is 10.2%.
In OECD member states like Ireland, Korea, Switzerland, Germany, the Netherlands, the UK and US the percentage is below 10% of GDP.
One of the pillars for economic recovery and growth is a “massive infrastructure development programme.” But, says Weimar, there is no massive infrastructure rollout.
Capital expenditure is going to grow from R187 billion in 2020 to R275 billion. “It really is not massively impressive. As a percentage of GDP it is extremely tiny – only 4.7% of GDP. In real terms it is not doing much at all. Infrastructure spending is more spin than substance,” says Weimar.
Nedbank considers government’s growth projections of 3.3% for this year as being realistic. It projects growth of 3.5% and the South African Reserve Bank 3.6%.
Chifipa Mhango, chief economist of the Steel and Engineering Industries Federation of Southern African (Seifsa), says the projected real economic growth rate of 3.3% in 2021 is too weak to provide a massive platform for higher demand for metal and engineering products such as steel.
A sustained economic growth rate above 5%, supported by growth rates of above 10% in the construction sector, is ideal, he said.
Mhango expressed disappointment that there are still no concrete details around addressing logistical costs and rising energy costs, which are eroding the competitiveness of local producers in the metal and engineering sector.