Finance Minister Tito Mboweni’s 2021 budget is a balancing act between supporting the government’s economic recovery plan and arresting its debt. Despite these efforts, data shows that the prospects of meaningful economic growth soon are “uncertain”.
The treasury estimates that the economy contracted by 7.2% in 2020, but real economic growth for 2021 is projected at 3.3%. Based on this contraction and structural growth constraints, South Africa’s real gross domestic product GDP is not expected to return to pre-pandemic levels before the latter part of 2023.
“Given South Africa’s structural constraints, its recovery will be slower than many of its developing country peers. The weak labour market, financially distressed public corporations and fragile business and consumer confidence will contribute to domestic growth moderating to 2.2% in 2022 and 1.6% in 2023,” the treasury’s documents read.
Growth would occur, but an uncertain supply of electricity and the cost of the Covid-19 pandemic are dark clouds hanging over the country’s prospects.
The health department is giving the Johnson & Johnson vaccine to healthcare workers. Government support for the public health sector as well as households and businesses affected by the pandemic has increased its spending to a record 41.7% of GDP, compared with 29.6% seen in the financial crisis of 2008 and 2009.
This expenditure has widened the budget deficit from 5.7% in 2019 and 2020 to an estimated 14% in 2021.
The treasury said the spending was necessary to cushion the blow of the pandemic on citizens, but it will focus on repairing finances in the mid-term.
After last year’s mid-term budget, Mboweni noted that government spending has failed to equate to economic growth.
“Since 2008, real spending growth has averaged 4.1% annually, well above annual real GDP growth of 1.5%. Despite high levels of expenditure, supported by increased debt accumulation, growth has not recovered to pre-2008 levels,” the treasury’s documents said.
Furthermore, real GDP per person has been falling since 2013-14, which means the average South African is becoming poorer, despite high and rising fiscal deficits.
Investments are now lower than at any time since 2005, when they were 12.5%. In 2019 investments stood at 5.4% of GDP.
The treasury predicts that the budget deficit will narrow from 7.5% of GDP in 2020-21 to 0.8% in 2023-24. And gross government debt will stabilise at 88.9% of GDP in 2025-26.
To achieve this, the treasury will reduce its non-interest expenditure by R264.9-billion, or 4.6% of GDP, over the medium-term expenditure framework period. Most of these cuts will come from the public sector wage bill.
Tax revenue estimates for 2020-21 are R213.2-billion below the 2020 budget estimate; at the time of the 2020 mid-term budget, this shortfall was projected at R312.8-billion.
This gain was a result of improvements in personal and corporate income taxes, value-added tax, fuel levies and customs duties.
But the Treasury said revenue growth is expected to slow over the medium term. No additional tax measures are included in this budget period, and tax increases proposed earlier will be withdrawn to support the battered economy.
The treasury estimates that the consolidated budget deficit, which reaches 14% of GDP in 2020-21, will narrow to 6.3% by 2023-24.
But debt-service costs will rise from R232.9-billion in 2020-21 to R338.6-billion in 2023-24. “These costs, which were already the fastest-rising item of spending, now consume 19.2% of tax revenue,” the treasury said.
Household consumption is expected to rebound in 2021-22, but investment is expected to decline for the third consecutive year as a result of persistent electricity interruptions, low investor confidence and low capital spending by public corporations.