/ 23 February 2022

A hopeful budget as ‘fiscal consolidation’ comes to an end and South Africa’s prospects improve significantly

February 23 2022 Minister Enoch Godongwana Delivers His Budget
Finance Minister Enoch Godongwana. (Photo: David Harrison)

Austerity. It’s been the course that South Africa, with our highest unemployment rate of the world’s most industrialised nations, has been following for more than a decade as growth rates have faltered and expenditure climbed. It’s a style of “fiscal management” often dismissed by the seven different finance ministers the country has had over the past seven years — quite a number — but the focus on reducing expenditure has been the key performance indicator. 

Within the next couple of years, however, and as long as an upswing in commodity prices remains largely intact, the period of fiscal consolidation is nearing its end.

By 2023-24, a year earlier than expected, the country looks set to achieve a primary surplus — where revenue is higher than non-interest spending. 

“This will bring the period of fiscal consolidation to a close, creating space to reconsider the funding of South Africa’s priorities in a fiscally stable environment,” the national treasury said in its 2022 budget review.

High commodity prices, in the main attributable to global supply constraints in the aftermath of Covid-19, have boosted the country’s tax receipts from resource companies such as Anglo American, just as large swathes of the economy have come under pressure from the various stages of lockdown over the past two years. For the first time since 1990, the country hasn’t had to resort to the quick-win change in the fuel levy to boost its coffers — a welcome relief for consumers who have had to deal with petrol prices at record levels of R20/litre.

This is a surprisingly good news budget, and quite a surprise given the low confidence levels that continue to dog all spheres of society. 

A pandemic and record rates of unemployment, exacerbated by the July protests that saw billions of rands worth of damage, would in normal times not make for promising fiscal metrics. Yet, here we are, with a treasury now forecasting debt to stabilise at 75.1% in 2024-25, a year earlier than estimated in the medium term budget speech that took place a little over three months ago.

A bullish Finance Minister Enoch Godongwana said at a press conference before his budget speech that he was apprehensive of the country’s position when he was appointed in August. But he now says the tide is turning. 

“I am not as panicked as I was, I am relaxed, we have the capability to change things around.”

If you think that commodity prices are about to fall off a cliff in the short term because of a strong US dollar as the interest rate increases because of inflationary pressures in that country — a strong US dollar generally dampens commodity prices in that currency — well, then this excitement and confidence from the finance minister will be rather short-lived given the still unimpressive growth expectations over the next three years in South Africa. 

An average growth rate of 1.8% over the next three years is woeful to say the least. 

But with Russian tanks traipsing across Eastern Europe, oil prices touching the $100 mark and asset prices across the world wobbling, it will be difficult to forecast for certain just what’s to come over the next three months, let alone a year.

Tide is changing for South Africa

As it stands, our outlook is the best it has been in years.

When former finance minister Trevor Manuel came to that “holy grail” of a mark for any country, reaching an overall surplus, the country had the fiscal space to spend handsomely on preparations towards hosting the football World Cup, which meant upping the spend on infrastructure. Eskom went about spending on increasing its generation capacity, something we would come to rue years later. But it was during this spend that our growth rates hit the 5% mark that economists have long said could finally eat into our structural unemployment problem.

To say we are about to enter into a similar realm would be a stretch, but the conversation can at the very least change. It will be critical that, whatever wriggle room the treasury gets to spend for more supportive measures for economic growth, we don’t repeat the mistakes of the past. Spend should be of the highest quality. 

The treasury and the department of public service and administration will be tested in the next round of public sector wage talks set to begin next month as unions consider the upturn in fortunes. They’ve already warned that “should collective bargaining result in salary adjustments that exceed compensation ceilings, reductions in headcount will be required.”

There are risks to the “good news” that this year’s budget has delivered — high global inflation, monetary policy adjustments, falling commodity prices and geopolitical risks — that one can’t ignore. 

But the prospect of an end to fiscal consolidation could signal an end to years of confidence-sapping tales of expenditure cuts that have fed into record low rates of confidence amongst all spheres of society. 

A hopeful budget? We never saw it coming.