Significant upward pressure from the higher-than-budgeted public sector wage bill increase and the mooted Basic Income Grant (BIG) will add pressure to expenditure.
Finance Minister Enoch Godongwana could not have foreseen that the global economy would go through so much turbulence when he tabled his optimistic budget in February, forecasting 2.1% growth for South Africa in 2022.
The domestic economy was on a rebound having recorded a second consecutive quarter of upward growth, returning to pre-pandemic levels after two years of Covid-19 lockdowns.
Russia had not invaded Ukraine. KwaZulu-Natal had not been pummelled by devastating floods. The price of petrol had not breached R20 per litre. Eskom had not intensified its rotational power cuts. Inflation and interest rates were on the rise but still very low. And Transnet workers were far from bringing the economy to heel.
However, a short eight months later, the unthinkable has come to pass.
Fiscal metrics have been tested to the limit by the global slowdown and rising demands for social protection, while higher interest rates have put a global recession in sight.
In spite of these challenges, economists are optimistic that the conservative forecasts of the February budget and the expected R130 billion revenue overrun should give Godongwana ample space to steer the fiscus to the right path when he tables his Medium-Term Budget Policy Statement (MTBPS) on Wednesday.
Godongwana has emphasised the need for fiscal consolidation, curbing the rate of the wage bill, and debt management since he took office in August 2021.
“Our long-held view that the National Treasury’s 2022 national budget revenue assumptions were too conservative is likely to be vindicated in its MTBPS,” said Jeffrey Schultz, senior economist at BNP Paribas South Africa.
“Stronger-for-longer commodity prices, higher nominal GDP (gross domestic product) helped by faster inflation and still-resilient tax revenue buoyancy in both corporate and personal income tax lend themselves to an improved consolidation trajectory.
“We see more than R100 billion, or 1.5% of GDP, in revenue upside potential for the 2022/23 financial year compared with the National Treasury’s February assumptions.”
However, there are growing concerns that the higher public sector wage offer, additional fiscal support for smaller state-owned entities and disaster relief funds will push the government’s spending slippage and likely raise debt service costs.
Transnet and Eskom are expected to dominate once-off expenditure items in the medium-term.
Transnet was recently forced to grant its striking employees wage increases of 6% to end the crippling 12-day work stoppage, well above the 3% per annum the entity had budgeted for, which stresses the need for its bailout.
Eskom is also likely to receive a financial allocation in addition to lighten its R400bn debt burden.
Nedbank economists forecast aggregate expenditure growth to average 6.4% per year between 2022/23 and 2024/25, primarily due to the faster increase in the public sector wage bill, additional allocations to social expenditure and higher debt service costs.
Nedbank’s macroeconomist and emerging markets analyst Isaac Matshego said the most significant upward pressure on expenditure will come from the higher-than-budgeted public sector wage bill increase.
Matshego said the mooted Basic Income Grant (BIG) would also add about R40bn to the new expenditure pressures, with a 2.5% a year increase in the subsequent years.
“The increase in borrowing will raise interest service costs. Encouragingly, our forecasts suggest that debt service costs, excluding Eskom debt, remain below 20% of revenue at 17 cents per R1 of total revenue in 2022/23,” he said.
“However, in the absence of additional revenue growth, including Eskom’s debt would push the ratio to more than 20% by 2024/25.”
As a result, the debt-to-GDP ratio is expected to breach 70% in 2022/23 and rise to as much as 75.7% in 2024/25 if Eskom’s debt is included.
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