The 2021 Budget attempts to reinforce fiscal consolidation without raising taxes, but key uncertainty remains whether Government will obtain agreement from public sector unions for negligible nominal wage increases.


Finance Minister Tito Mboweni went into the 2021 Budget with the satisfactory knowledge that government revenue has been coming in significantly more strongly in recent months than National Treasury had budgeted for when he tabled the Medium-Term Budget Policy Statement (MTBPS) in October last year. It is not that the government would raise as much revenue as had been budgeted for in the February 2020 Budget prior to the onset of the COVID-19 crisis which came on suddenly and decimated economic activity through the course of last year. However, it has been turning out in recent months that the amount of revenue being collected would not fall short by as much as R313bn which was the estimate of the shortfall at the time of the MTBPS. Instead, based on the fact that in the first nine months of the 2020/21 fiscal year, government revenue had grown -10.1% y-o-y instead of the budgeted -15.9%, expectations were that revenue would come in some R90bn to R100bn higher than the dreadful MTBPS revenue forecast. In the event, the latest Budget now puts the revenue shortfall for the latest fiscal year at – R213bn, or R99.6bn less than the -R313bn shortfall that had been feared. There are a number of theories to explain this relatively less negative outcome. Firstly, the prices of metals and minerals as well as agricultural products exported by South Africa have been surging. Profits in mining and agriculture as a consequence have been very buoyant and presumably the company tax payable has also risen sharply. Some of the increased cash flows generated have probably also gone towards the purchase of consumables and on long-standing maintenance work, both of which have generated an increase in VAT. Secondly, it has become apparent that the brunt of the pain caused by the COVID-19 crisis in terms of job losses or pay cuts has been borne by lower income groups, including those in formally employed. The dominant share of the tax collected, however, has been generated by middle to higher income groups, mainly more educated persons, who have retained their employment and salaries and in many cases have increased them. Their tax liability has therefore remained elevated. One suspects that the Treasury had not taken this distortion created by high levels of inequality into account. Thirdly, the impact of the COVID-19 crisis has varied dramatically between different industries. Some have fared extremely well whilst others have been devastated. In particular, financial asset prices have been driven up to record levels in many instances by the abundance of liquidity poured into global financial markets by the world’s leading central banks to counteract the depressionary effect of the crisis. Consequently, those with financial assets have reaped substantial capital gains on which tax has been payable. The combination of these factors is manifested in the fact that all the main sources of tax have seen substantial overruns compared with what was budgeted for in October. More generally, economic growth projections have been revised upwards. Especially for 2020, Treasury forecast that the economy will have contracted by -7.2%, instead of the -7.8% forecast at the time of the MTBPS. (The actual figure has since been released by Statistics South Africa as having been -7.0%) Forecasts for 2021 were left unchanged at 3.3%, but for 2022 were upwards to 2.2% from 1.7% previously. Most would see these as reasonably conservative forecasts.


The big question going into this Budget was whether or not the resultant sharp reduction in the government’s borrowing requirement compared with previous expectations would be utilised. In the event, as expected, an amount of R10bn was set aside for the purchase of vaccines and a further R7bn was inserted into the contingency reserve largely to help pay for the rollout of these vaccines. Secondly, an amount of R6.3bn was set aside for extending the special social grant allocated to 6m unemployed individuals who have no access to conventional social grants. This still left one wondering whether the government would raise the tax burden is intimated might happen in earlier budgets. The fact that no such tax increases were forthcoming therefore came as a welcome sop to income earning individuals. Indeed, the government decided to more than compensate individual taxpayers for the ravages of inflation in causing bracket creep, allocating R13.4bn to compensate for bracket creep, which was R2.2bn more than needed for this purpose. There is therefore no basic increase in average tax rates in the coming year. Accordingly, there is unlikely to be any negative effect on economic growth from higher taxes. On the contrary, the company tax rate has been reduced from 28% to 27% as from a years time, but the quid pro quo will be to adjust the manner in which the assessed tax losses are handled. The impact is likely to therefore vary from company to company. Nonetheless, the allocation of additional funds for vaccines and social grants, together with the absence of meaningful tax increases, is welcome. The biggest concern one might have had is that in an attempt to defuse potential labour unrest, the government might decide to increase public sector remuneration a little more liberally than the stringent budget forced on public servants’ pay prospects in the MTBPS. However, Mboweni was adamant and outspoken in his commitment to fiscal consolidation. Consequently, there was thankfully little letup and compromise on the issue of public sector remuneration that might be seen to compromise such a commitment in the marketplace. There was a minor increase in projected average annual remuneration for public servants to 1.16% per annum, from 0.8% per annum in the MTBPS.


Indeed, the ratio of government spending to GDP is projected to decline in quite a Draconian fashion, from 29.2% in 2021/22, to just 26.2% in 2023/24. By most standards such a curtailment of budgeted expenditure in a mere two years is unprecedented. The government’s intention is to close the “mouth of the hippopotamus” to paraphrase the Minister, between surging expenditure and falling revenue. As a consequence, the government has been able to project a reduction in consolidated budget deficits compared with the MTBPS, to -14.0% of GDP from -15.7% for the current 2020/21 fiscal year, from -10.1% to -9.3% for 2021/22, from -8.6% to -7.3% for 2022/23 and from -7.3% to -6.3% of GDP for 2023/24. Essentially the government has reduced its budget deficits and consequent borrowing requirement by a cumulative 4.8% of GDP, or around R237bn over the next three years. Thankfully, this translates into a reduction in the projected growth of debt servicing costs from an average of 16.1% per annum previously, to 13.3% currently. However, highlighting the manner in which the government is being obliged to reduce expenditure in order to make way for higher and higher interest payments, overall growth in expenditure is projected to average just 0.7% per annum over the next three years, i.e. considerably lower than an average inflation rate of 4.2% per annum over this period, implying a reduction in real terms of 3.5% per annum. From a public debt to GDP perspective, the rising trajectory has been tempered somewhat now to peak at 88.9% in 2025/26, compared with a peak of 95.3% of GDP in the MTBPS. There are of course significant costs in this regard, not least of all the need to cut back on essential social services such as social protection. Indeed, the share of social development to total expenditure is earmarked to fall from 20.1% in 2020/21, to just 15.5% in 2023/24. Some of this can be seen in the fact that old age pensioners and war veterans are set to receive increases of just 1.6% over the coming year, well below the projected inflation rate of 3.9%, whilst child support grants increase by an also suboptimal 3.4%. This represents a classic example of the kind of degeneration in the economy that can occur if a growing debt crisis is not nipped in the bud. Debt servicing costs grow out of proportion to all other kinds of expenditure and crowd out the government’s ability to look after its citizens appropriately.


In essence therefore, there can be no doubt that the latest Budget fulfilled the imperative of fiscal consolidation. It also fulfilled requirements of a certain degree of compassion and resistance to introducing measures that might have an undue dampening effect on overall economic activity. The elephant in the room, however, is whether or not the government will succeed in buying the support of public sector unions for what is a fairly dramatic reduction in their real remuneration over the next three years? In essence they would have to agree to a real pay reduction of almost 10% over that period. Critics will argue that public servants have been fortunate enough to retain their jobs and receive no pay reduction over the past year at a time when many of their counterparts in the private sector have become destitute. Against this, the public sector unions will argue that government has wasted away their potential benefits through corrupt practices over the past decade, whose accumulation has led to a situation where they have had to be dramatic cutbacks in expenditure on social services. The situation is further complicated by the fact that it was these trade unions who form the backbone of support for President Cyril Ramaphosa’s drive to lead the country four years ago and he would therefore hate to disappoint them and lose their support. Already the ire of many of these unions has been raised by the backtracking of the government on a three-year wage agreement reached in 2018, by not granting any pay rise in the final year of that agreement which is the current one. According to Mboweni, negotiations with the unions are set to take place later in the year. In the interim, assessment of the 2021 Budget is likely to remain in a sceptical abeyance until such time as greater clarity and reassurance is reached as to whether or not the state will be able to stick to its commitments. In recent years, one has noted a loss in the relative power of National Treasury in decision-making and the assumption of more power within the Presidency and the Department of Public Enterprises.


The Rand and bond market seemed to receive the Budget reasonably favourably, with a slight appreciation in values following the Budget, but many of these gains were subsequently unwound. Very soon credit ratings agencies will assess the Budget themselves with their own reviews and determine whether or not to downgrade the credit rating on South African government bonds still further and deeper into junk status. Market reaction in that regard appears to have been relatively indifferent. Nonetheless, one suspects that one or two of the three main ratings agencies might still see fit to downgrade the country’s credit rating on the basis of a lack of credibility in the government’s ability to withstand the demands of the unions. Fortunately, the dominance of domestic currency and bond markets by international financial sentiment could well provide ongoing support for domestic financial assets in the short term notwithstanding the scepticism likely to continue prevailing for some time regarding the credibility of what superficially appear to be favourable budgetary parameters. One needs to reflect on the fact that notwithstanding the reduction in borrowing requirement compared with four months ago, the country continues to face a horrific increase in its public debt in coming years. None other than Mboweni himself reiterated this point in his budget speech. The prospect of a default on government debt in the longer term cannot be entirely ruled out notwithstanding a seemingly valiant attempt at a stay of execution from a short-term perspective implicit in this latest Budget. The principal way in which the country can avoid such a cataclysmic outcome is to embark upon necessary structural reforms to fight corruption, implement infrastructural projects, fix state-owned enterprises, embark upon massive and appropriately directed educational upliftment, reduce overregulation to encourage small business activity, widen the net for private power producers to enter the market to produce electricity, introduce broadband spectrum to reduce costs of digital communication and improve the capacity of the state, especially at municipal level. Addressing these issues could well reverse the downward trend in South Africa’s economic growth experience over the past decade and start lifting tax revenues in such a way as to limit the size of deficits and reverse the rising trend of public debt. For such objectives to be achieved, factional battles within the ruling party need to be overcome.