WORDS ON WEALTH
Economists and market commentators were mostly positive and even “pleasantly surprised” in their reaction to Finance Minister Enoch Godongwana’s mini-budget speech (officially the Medium Term Budget Policy Statement) in parliament yesterday.
Those who may have expected a softening of previous minister Tito Mboweni’s relatively hard line on fiscal consolidation (essentially, cutting government spending) and policy reform would have been surprised at Godongwana’s reinforcement of this approach. This indicates, says Johann Els, the chief economist at Old Mutual Investment Group, that the cabinet is generally in support of fiscal consolidation and is standing behind the new finance minister. “There was no jump to the left,” he said.
The overall economic environment looks far rosier now than it did a year ago, when we were in the depths of the pandemic and the government was forking out huge amounts of money in emergency support grants. Godongwana’s job yesterday was far less stressful than Mboweni’s this time last year. The worst of the pandemic appears to be behind us, business activity is picking up nicely (GDP growth is expected at above 5% this year, although that will fall back to below 2% thereafter), and tax revenue was significantly boosted by a welcome windfall from the mining sector. Government debt, which a year ago seemed to be dragging the country into a disastrous debt spiral, appears to be levelling out and, if Els’s positive outlook proves correct and the government continues on its consolidation path, we may be looking at the stabilisation of debt and a primary surplus by 2024/25. (A primary surplus is when tax revenue exceeds government spending on everything except servicing debt.)
Another positive, as reflected in National Treasury’s forecasts, is that while interest rates will increase slightly, inflation is not expected to rise significantly, levelling out in the middle of the SA Reserve Bank’s target range of 3-6%.
Let’s look specifically at implications for consumers:
The government may be able to contain its debt levels (limiting the debt-to-GDP ratio to below 80%, compared with last year’s MTBPS that projected the ratio rise to 95.3% in 2025/6), but the cost of servicing its debt is concerning. Citadel’s chief economist, Maarten Ackerman, and Citadel chief investment officer George Herman say debt servicing remains an issue as it’s the fastest growing component in the budget, at 10.8% a year. “Debt repayment costs on R4 trillion of debt are expected to increase from R269.2 billion this financial year to R365.8 billion in 2024/25. This amount is higher than the health and police services budgets combined, meaning critical service delivery is being forfeited to repay national debt,” they say.
Wages for government employees
Godongwana recommitted the government to curbing spending, especially concerning its huge wage bill, whereby government employees have, until recently, been receiving generous above-inflation annual salary increases. While there is expected to be push-back from unions, increases will probably be below inflation for the foreseeable future.
Nothing was forthcoming on either a basic income grant or National Health Insurance. More details will emerge in next year’s February Budget speech, but Els says it is unlikely that the basic income grant will materialise. However, some sort of continuing relief for poorer households hardest hit by the pandemic was likely, given that the government was leaning towards redirecting future taxation windfalls to social projects. “Any future expansion of the social security system must meet tests of sustainability and effectiveness, including being fully and appropriately financed on the one hand, and evaluated against the government's pre-existing priorities, on the other,” Els said.
Interest rates and inflation
The current cycle of decreasing interest rates is probably over – the key rate, known as the repo rate, is at a record low of 3.5%. Economists expect rates will start rising, but Els believes that the rise will not be large enough to disrupt economic growth. Inflation has recently picked up – government’s forecast is 5.1% for 2021 – but longer-term projections are that it will settle back to the 4-4.5% range.
The minister did not announce any increases in taxes in the MTBPS, and economists are broadly of the view that, apart from possible rises in fuel levies and sin taxes, there will be no increase in South Africans’ tax burden when Godongwana presents the main Budget speech in February.
Retirement fund reform
Some commentators expected that the minister would make an announcement regarding the proposed “two-bucket” retirement system, in which retirement fund members would have access only to a third of their savings in an emergency (as opposed to currently being able to access 100% of their savings when they change jobs). Again, he deferred to February next year.