South Africa’s Treasury promised to put state finances back on a sustainable path, delaying the expansion of welfare measures in one of the world’s most unequal societies.
Delivering his first budget since he was appointed Finance Minister in August, Enoch Godongwana set more ambitious targets to control debt, reduce loan servicing costs, reduce the budget deficit and cut spending in the coming year, while still meeting. with the commitment to freeze civil law. servant salary.
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The former trade unionist and head of economic transformation in the ruling African National Congress also vowed to accelerate structural reforms to boost economic growth and address the ravages caused by the coronavirus and deteriorating government finances caused by a decade of overspending. , mismanagement and corruption.
“The Medium-Term Budget Policy Statement charts a course that demonstrates the government’s unwavering commitment to fiscal sustainability, enabling long-term growth by reducing the budget deficit and stabilizing debt,” Godongwana said in a speech prepared for pronounce itself in Cape Town on Thursday.
While South Africa’s finances remain volatile, the situation has improved since February, when the annual budget was announced. That’s partly due to an upward revision to gross internal data and mining companies’ windfall revenues driven by higher commodity prices.
Debt levels are now expected to peak at 78.1% of GDP in fiscal 2026, before falling to 75.2% of GDP by the end of the decade, according to the National Treasury.
Revenues for the current fiscal year will likely exceed estimates by R120.3 billion ($ 7.9 billion). Half of that has already gone to help fund relief measures following the deadly riots in July, plus purchases of Covid-19 vaccines, a cash payment for public officials and an employment initiative in a country where more than one a third of the workforce is unemployed.
Part of the remainder will be used to pay off debt, helping to reduce the consolidated budget deficit to 7.8% of GDP in 2021-22 from 10.8% the previous year, which was the largest deficit since World War II. . Debt service costs, the fastest growing spending item since 2011, are now forecast to peak at 5.3% of GDP in 2026, before declining to 5% of GDP three years later.
A heavyweight in the ruling party and key ally of President Cyril Ramaphosa, Godongwana’s resolve may be tested by the ANC’s worst electoral performance last week since the end of the white minority rule in 1994. The demands of the factions Within the party that already opposes fiscal austerity may escalate and lead the government to promise more social support before the 2024 national elections.
A monthly welfare payment of R350 that was reintroduced after the July riots will end in March. Civil society groups have proposed a basic income grant that business organizations say is unaffordable. The Treasury will only reserve additional funds for social relief if public finances improve in February, he said.
“Committing to higher levels of spending in the absence of faster economic growth will further undermine macroeconomic credibility, with increasingly damaging effects on the economy,” the Treasury said. See that the economy will grow by 5.1% this year before falling to an average of 1.7% until 2023.
The proposed fiscal framework could also be undermined by government wage concessions.
A court offer by the unions to force the state to implement the final phase of a three-year wage deal for state workers, at a cost of R37 billion, poses a risk to the government’s finances, the Treasury said. If the Constitutional Court rules in favor of unions, the government may have to raise taxes, increase loans and reduce the size of the public service, he said.
Other risks include electricity supply restrictions, political uncertainty and a shortage of coronavirus vaccines that would leave the country vulnerable to new strains of Covid-19 infections and stricter lockdown measures, he said.
Godongwana declined to say whether a 1 percent cut in the corporate tax rate will be implemented starting next fiscal year, as announced by his predecessor Tito Mboweni. The proposed reduction, which would be the first since 2008, would bring the rate to 27%. “I do not want to comment on that statement for now until the appropriate discussion at the time of February, where the tax is being discussed,” he said at an embargoed press conference.
For now, the government hopes to achieve a primary budget surplus, where revenues are higher than interest-free expenditures, by 2025. This year, the Treasury shifted its focus to obtaining a primary surplus, rather than a spending ceiling, as your most critical fiscal anchor. . The expected overshoot of 0.2% of GDP would allow it to “end the period of fiscal consolidation,” he said.
© 2021 Bloomberg