Declaring that he was staying the course set by his predecessor, Finance Minister Enoch Godongwana on Thursday committed to fiscal consolidation, refused further handouts to state-owned enterprises and said extending social relief distress grants would mean spending cuts elsewhere.
With debt at R4-trillion, there was no room to exceed the spending limits set out in his maiden medium-term budget policy statement (MTBPS), the minister warned.
The cabinet collective was welcome to debate spending priorities but the outer limits were cast in stone as the state tried to stabilise the debt-to-GDP ratio at 78.1% of GDP by 2025-26.
“You cannot change the framework, the framework determines the sustainability of the budget,” Godongwana said.
He confirmed that the treasury now expected the economy to grow by 5.1% in 2021, after contracting 6.4% in 2020, gutted by the Covid-19 pandemic that forced lockdowns.
“Over the next three years, the growth of the local economy is expected to average 1.7%, reflecting some structural weaknesses such as inadequate electricity supply,” the finance minister said.
Godongwana stressed that if the initial recovery was faster than expected, there was deep uncertainty that the current upswing would endure, with the doubt in large part a result of Eskom’s failure to keep the lights on. The strength of the recovery was also riding on the roll-out of Covid-19 vaccines, which he hoped would speed up.
Debt-service costs are expected to rise from R269.2-billion in 2021-22 to R365.8-billion in 2024-25, and to average R334.5-billion a year over the medium-term expenditure period.
Twenty-one cents, on average, of every rand collected in tax a year will pay for interest on public debt.
“The consolidated budget deficit is expected to be 7.8% of GDP in 2021-22, gradually lowering to 4.9% in 2024-25,” said Godongwana.
The minister has been on the job for just over 100 days and said those who congratulated him on his appointment wished him a soft landing on the other side of the fiscal cliff the country faced.
He said growth was imperative and relied on speeding up economic reforms, with a focus on bettering productivity, competitiveness, investment and — crucially — employment in a pandemic-stricken climate with a record jobless rate of 34.4%.
Godongwana acknowledged the pain felt by the poor, telling a media briefing just ahead of his speech to parliament that if he had a ready market intervention at his disposal to curb spiralling food inflation, he would implement it “tomorrow”.
But he brushed off suggestions that the budget was not “pro-poor”, saying all budgets have been just that because 60% of non-interest spending went to the social bill.
He did not rule out a further extension of the Covid-19 social relief of distress grant, saying it would cost about R40-billion to extend it beyond the end of March for the rest of the year.
“The social relief of distress grant was extended to the end of March 2022. Between now and March, the government will decide what will happen, not the treasury,” Godongwana said.
The decision to do this, or introduce a basic income grant, did not belong to him but to the cabinet and would wait for the new year, he stressed. Whatever the case, introducing any further welfare grant would mean cutting existing spending allocations to pay for it.
Godongwana confirmed a revenue increase of R120.3-billion — largely thanks to the mining industry — and said tax earnings would not reach R1.5-trillion in this financial year.
But he cautioned that this, too, may not last, because mining prices had started to soften, warning, “therefore we should be careful about our spending commitments”.
Asked where he differed from his predecessor, Tito Mboweni, Godongwana replied: “I think we are on the same page. We are broadly similar from a fiscal framework point of view. The only difference I see is the shoes we wear but in terms of structural reforms, we are on the same page.”
Thursday’s MTBPS showed non-interest spending increased by R59.4-billion for the year, with R20.5-billion going on a higher than expected public sector wage agreement. Consolidated government spending is expected to increase from R2.1-trillion to R2.24-trillion over three years or, put differently, reach R6.4-trillion over the next three years.
Flagging pandemic-driven job losses at more than one million over a year, Godongwana said the 2022 budget would allocate R74-million to public employment programmes over the three-year medium term because “the state must play a role in mitigating the impact of this crisis”, as much as private sector job creation was desperately needed.
He signalled that the state was increasing its funding for free education to R56.8-billion in the current year, and said it would total R158.8-billion over the medium term.
The minister said a special appropriations bill would be passed to pay for the deployment of more police during the July unrest in KwaZulu-Natal and parts of Gauteng. R11-billion has been allocated to the South African Special Risk Insurance Association to help businesses devastated by the violence and rioting.
Apart from giving state arms maker Denel R2.9-billion from the National Revenue Fund after it defaulted on a guaranteed loan, the treasury turned off the taps on troubled state-owned enterprises, including Eskom.
Godongwana said the time had come for “tough love”, and deciding which parastatals were of strategic importance to the state’s objectives.
“Some must fall,” he said, but stressed that this did not include rail, road and ports group Transnet and Eskom, in the case of the latter until something else was able to replace it. He said the problem with the power utility was that the state had, for 13 years, sought to rescue it yet its prime concern should not have been the company but the country’s power sufficiency.
“All our efforts over the past 13 years have been to fix Eskom, instead of addressing security of supply by adding additional capacity to the grid,” Godongwana said.
Asked how the government was going to manage Eskom’s rapidly maturing debt, the minister said it was Eskom’s task to manage it and for now there would be no funding following the R230-billion extended over a decade to service debt.
Regarding Transnet, he said the company would allow third-party access to its freight rail network by the end of next year.
The MTBPS was tabled 10 days after local government elections in which poor service delivery contributed to poll losses for the ruling party that pushed its vote share below the 50% mark for the first time in the democratic era and talks at some length of measures to turn around municipalities.
Godongwana described failing municipalities as one of the bigger risks to the fiscal outlook. The MTBPS frankly assesses that “substantive changes” are needed to make municipalities work and that many lack the capacity to carry out their financial responsibilities.
It says local government allocations will increase by 4.1% over the medium term to boost service delivery to the poor but more money for municipalities will be accompanied by increased national intervention. The allocation for the national government will contract by 1.8% and those for provincial governments will increase by 0.7%. This reconfiguration in the equitable share formula takes into account projected household growth, and increases in water and electricity costs.
Local government grants to improve water and waste management will come with conditionalities tailored to improve management and delivery, and in some cases direct transfers will be converted into indirect allocations, to be spent by national departments on behalf of municipalities.
“Government proposes to apply transparent and consistent criteria to create a more systematic approach to these conversations. This will give national departments more flexibility in using funds where they are most needed, while strengthening governance.”
The minister said ridding the procurement system of corruption and waste was key among the reforms the state had to implement. “For our growth and recovery agenda to succeed we need a state that is capable, well-governed and a society that is free of crime and corruption.”
The Investigative Directorate would get more funding to facilitate corruption prosecution.