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2021 MTBPS Navigates Path to Economic and Social Recovery

November 11, 2021

National Treasury

The 2021 Medium-Term Budget Policy Statement (MTBPS) is “about navigating South Africa’s path to economic and social recovery, drawing on the resilience of her people as well as restoring the sustainability of our public finances and the dignity of our people in the face of a once-in-a-lifetime pandemic”.

The finance minister, Enoch Godongwana, declared this during the tabling of his maiden MTBPS in the national assembly.

The minister added that the MTBPS “charts a course that demonstrates government’s unflinching commitment to fiscal sustainability, enabling long-term growth by narrowing the budget deficit and stabilizing debt”.

According to the minister, the 2021 MTBPS was being tabled under unprecedented conditions.

The Covid-19 crisis is likely to leave deep and long-lasting scars on the global economy.

“The scarring impact of the crisis is evident in increased debt levels, income vulnerabilities; while unemployment, poverty and inequality are deepening”, he said.

ECONOMIC OUTLOOK

 

Global Economy

Treasury indicates that the International Monetary Fund expects global GDP to increase by 5.9 per cent in 2021, moderating to 4.9 per cent in 2022.

The outlook, however, remains highly uncertain due to higher and more persistent inflation as well as the outlook for commodity prices.

Advanced economies are expected to return to pre-pandemic expectations for growth in 2022, while emerging markets and developing economies are expected to remain below pre-pandemic projections.

Treasury highlighted that it is notable that growth has recovered faster than employment.

 

Domestic Economy

National treasury points out that the South African economy grew faster than expected in the first half of 2021, but this momentum is expected to wane following public violence in July, port and rail disruptions and the third wave of COVID-19 infections.

Real GDP is forecast to grow by 5.1 per cent in 2021 from a 6.4 per cent contraction in 2020.

Output is expected to return to pre-pandemic levels in 2022, a year earlier than estimated in February largely due to global demand, higher commodity prices and the easing of COVID-19 lockdown restrictions.

Inflation is currently contained within the target band, despite upward pressure from food and energy prices.

It is projected to reach 4.5 per cent in 2021.

The labour market is weak, with unemployment at 34.4 per cent.

The local economy is expected to grow by an average 1.7 per cent over the next three years reflecting some structural weaknesses such as inadequate electricity supply.

According to the finance minister, the strength of South Africa’s economic recovery will also depend on the roll out of vaccines.

“A higher take up of vaccines will reduce the risks of future waves of the pandemic and associated disruptions to economic activity”, he said.

Treasury also declared that policy uncertainty and the slow implementation of structural reforms continue to weigh on business confidence and investment.

Worsening electricity supply constraints in the short term could constrain the recovery.

Other risks to the domestic growth outlook include possible further credit rating downgrades due to a deterioration in public finances as a result of additional spending pressures and the materialisation of contingent liabilities.

“These in turn would increase borrowing costs and crowd out public spending on service delivery and infrastructure.”

Possible future waves of COVID-19 infections could also result in further disruptions to economic activity.

Treasury emphasizes that a “durable recovery and growth in jobs require urgent implementation of reforms to improve competitiveness, and the ease and cost of doing business”.

 

FISCAL POLICY

Government remains committed to reducing the budget deficit and stabilising the debt-to-GDP ratio.

According to treasury, fiscal consolidation will reduce debt-service costs to below 22 per cent of main budget revenue by 2026/27.

As regards revenue collection, it remains well below pre-pandemic expectations.

Revenue from 2020/21 through 2022/23 is forecast to be R284.7 billion below the 2020 Budget projections.

However, owing to faster economic growth, revenue collection has improved in the current year compared with the 2021 Budget forecast.

Revenue for 2021/22 is now estimated to reach R1.5 trillion, compared to R1.4 trillion at the time of the 2021 Budget in February.

The revenue windfall will partially support increased allocations for urgent social and economic priorities, increasing non-interest expenditure. Government will maintain such allocations should revenue performance improve over the medium term.

The consolidated budget deficit will measure 7.8 per cent of GDP in 2021/22 and narrow to 4.9 per cent in 2024/25 – the first year since 2008/09 in which government expects revenue to exceed non-interest spending.

Gross debt is expected to stabilise in 2025/26 at 78.1 per cent of GDP.

Treasury points out that the fiscal outlook is highly uncertain. Major risks include the durability of the economic recovery, the legal process associated with public-service wages, and future wage negotiations.

In the broader public sector, several state-owned companies and municipalities have insufficient funds to cover operational expenses.

Government’s proposed fiscal stance is in line with the approach adopted in the 2020 Special Adjustments Budget and the 2021 Budget.

Treasury emphasised that efforts to narrow the budget deficit and stabilise debt remain broadly on track.

“Staying the course will enable government to bring fiscal consolidation to a close more quickly than anticipated, in 2024/25.”

 

SPENDING PRIORITIES

 

Consolidated government spending is expected to increase from R2.13 trillion in 2021/22 to R2.24 trillion in 2024/25, at an average annual growth rate of 1.7 per cent.

Main budget non-interest spending is increased by a net R59.4 billion in 2021/22. Total in-year upward adjustments to spending amount to R77.3 billion, mainly to reinstate the special COVID-19 social relief of distress grant until March 2022, and for costs associated with the implementation of the 2021 public-service wage agreement and the outbreak of public violence in July 2021.

Treasury indicates that the additions are partially offset by projected underspending, drawdowns on the contingency reserve and provisional allocations announced in the 2021 Budget.

R11 billion provisionally set aside in the 2021 Budget is allocated for phase 2 of the presidential employment initiative until the end of March 2022.

No spending reductions are proposed in the 2021 MTBPS largely due to improved revenue, which will help lower the fiscal pressure posed by increasing debt levels over the medium term.

Over the medium-term expenditure framework (MTEF) period, allocations to provinces increase by R15.7 billion and allocations to local government increase by R1 billion relative to the indicative allocations in the 2021 Budget.

 

IN THE PIPELINE

 

The finance minister announced that work on the Draft Public Procurement Bill is wrapping up.

The proposed legislation seeks to regulate public procurement and prescribe a framework for procurement policy envisaged in section 217(3) of the Constitution.

The plan is to table the draft bill in parliament in the 2022/23 financial year.

As regards retirement reforms, treasury is proposing measures to boost household savings by increasing preservation before retirement and to increase flexibility through partial access to retirement funds through a “two-pot” system.

The plan is to allow individuals to access contributions to the one pot while contributions to the other pot would be saved until retirement.

A discussion document on the details of the proposal will soon be published to obtain inputs before further announcements are made in the 2022 Budget.

Details on interventions with regards to the social security net will be provided in the February 2022 Budget.

In terms of small businesses, new small business support measures to enable affected businesses to bounce back are under consideration.

“This we will do by providing expanded funding options, broadening the types of financial institutions which can provide this funding to include DFI’s and non-banks.”

Work is underway with the South African Reserve Bank, the Banking Association of South Africa and other stakeholders to finalise the proposal and further details will be announced shortly.

Treasury also plans to focus between now and February 2022 on the details of measures to deal with the socio-economic challenges prevalent in the country.

“This must be done in a manner that does not depart from the strategy of stabilizing government debt. Recommendations in this regard will depend on the availability of resources, including policy trade-offs and reprioritization.”

According to the minister, the key to solving South Africa’s developmental challenges is the need to push ahead with structural reforms necessary to unlock the growth of the economy including bringing additional electricity capacity onto the grid and fixing Eskom.