/ 23 February 2022

Budget 2022: ‘There is a light at the end of the tunnel’

February 10 2022 The State Of The Nation Address Held At The City Of Cape Town City Hall, Cape Town, South Africa. Photo By David Harrison
Finance Minister Enoch Godongwana. (Photo: David Harrison)

South Africa’s public finances are a giant leap closer to being sustainable, according to the 2022 budget tabled on Wednesday.

The budget review, which is the first tabled by Finance Minister Enoch Godongwana, revealed that revenue will exceed spending by 2023-24 — a year earlier than anticipated in last November’s medium-term budget policy statement. 

This, treasury director general Dondo Mogajane’s foreword to the review noted, is “a major milestone” that has come after more than a decade of stagnant economic growth.

The country’s improved fiscal outlook has benefited from higher tax collection compared with earlier estimates. Revenue has been boosted by a strong commodity cycle and tax collections from South Africa’s mining sector. Revenue performance, the budget noted, is projected to continue over the medium term.

Mogajane noted that, from 2008, South Africa’s growth has been weighed down by long-standing structural constraints. This, paired with the effects of state capture and the economic shock of Covid-19, has drained the country’s public finances. 

“The cumulative result was a colossal increase in public debt. In 2008-09, real public debt was equivalent to R22 869 for every person living in South Africa; today, it stands at R69 291 for every person in the country … Ending this situation to free up resources for national development has been a central government objective — and we are doing what we set out to do,” Mogajane said.

“It has been an extraordinarily difficult adjustment, but there is light at the end of the tunnel.”

According to the budget, South Africa’s medium‐term growth prospects are moderately stronger than forecast in the medium-term budget policy statement. The economy is expected to reach pre-pandemic levels of GDP this year, with expansion expected to average 1.8% over the next three years.

South Africa’s economic recovery from Covid-19 has been markedly different from previous shocks, the treasury noted in the budget review: “Following the 2008 global financial crisis, it was several years before major tax categories recovered to pre-crisis collections from income and consumption. Tax resiliency in this recovery has been far stronger, potentially due to the artificial nature of the downturn through lockdowns and enforced restrictions on activity, rather than damage inflicted by a recession.”

The government, the treasury said, is using a portion of the additional revenue to accelerate debt stabilisation, with the majority targeted to address urgent social needs, promote job creation through the presidential employment initiative, and support the public health sector.

Efforts by the government to tighten its purse strings will mean that debt will stabilise at 75.1% of GDP in 2024-25, a year earlier than estimated in the 2021 medium-term budget statement.

The treasury’s upbeat tone on Wednesday came with a caveat: the fiscal outlook is subject to significant risks. These risks include slowing economic growth, more difficult global borrowing conditions, calls for a permanent increase in social protection, pressures from the public-service wage bill and continued calls to bail out financially distressed state-owned entities.

Earlier in February, President Cyril Ramaphosa announced the extension of the R350 social relief of distress grant for another year. In the meantime, the government will assess the feasibility of a more permanent form of income support, the president said.

Any permanent extensions of social support, the treasury said, will need to be matched by new tax measures or expenditure reductions.

In his speech, Godongwana called higher revenue “a positive surprise”. But, the minister added, “one swallow does not a summer make”.

“The improved revenue performance is not a reflection of an improvement in the capacity of our economy. As such, we cannot plan permanent expenditure on the basis of short-term increases in commodity prices. To be clear, any permanent increases in spending should be financed in a way that does worsen the fiscal deficit.”

According to the budget review, the government will introduce a new fiscal anchor. This is a method to ensure that the government maintains expenditure within agreed limits. This, the budget says, will help secure a sustainable fiscal position for the long term. 

A more robust fiscal anchor will likely entail moving away from the spending ceiling, which was introduced in the 2013 budget. However, its effectiveness has been limited and fiscal imbalances continued to grow through the rest of the decade, the budget notes. A new fiscal anchor may use debt or expenditure as a percentage of GDP

The budget review also noted that there were signs the Covid-19 economic crisis may have led to scarring — defined as medium‐term economic performance below pre-pandemic projections. Higher global inflation, monetary policy adjustments, commodity price changes and emerging geopolitical risks contribute to elevated uncertainty over the medium term. 

The initial recovery in economic growth during 2021, the review noted, was not matched by higher employment or investment. The slow take-up of vaccinations leaves the country vulnerable to new waves of Covid-19 infections. 

With spending stabilising a year earlier than expected, it is anticipated that the period of fiscal consolidation will be brought to a close in 2023-24. In 2024-25, main budget non-interest spending will grow slightly above inflation. Positive growth may lead to expansionary fiscal policy in which spending is used to stimulate the economy.