Godongwana says ‘the tide is turning’ but mulls new fiscal anchor to fully restore sustainability

Minister of Finances Enoch Godongwana insists that South Africa’s fiscal sustainability tide is turning, but also signaled on Wednesday that the government is considering the introduction of a new “fiscal anchor” to shore up modest improvements made to date and restore medium-term fiscal sustainability.

Godongwana’s first budget speech was buoyed by higher-than-expected tax revenue from the commodity boom, part of which would be used to cut the deficit, with much of the balance earmarked to support Covid-19 aid. in case of distress (approximately R44 billion) until 2023 and to support employment initiatives (approximately R18 billion).

As expected, the minister did not announce a new basic income grant and said that any large permanent increase in spending could not be met without a corresponding increase in revenue.

“The government is working on a long-term sustainable approach to social protection, consistent with the government’s broad development mandate and the need to ensure accessibility.”

The revenue estimate has been revised upwards by R182 billion to R1.55 trillion for 2021/22 from the figure given in the 2021 budget, and by R61.7 billion from the revised made in medium-term fiscal policy. Declaration (MTBPS).

Revenue forecasts for 2022/23, 2023/24 and 2024/25 have also been increased to R1.6 trillion, R1.7 trillion and R1.8 trillion respectively.

Spending of R2.15 trillion is planned for 2022/23, leaving a deficit of R386 billion for the year.

Improved revenues have enabled the minister to propose tax relief measures of R5.2 billion, which he says would help support economic recovery and provide respite from fuel price increases.

Most of the relief would be provided by an adjustment of personal income tax brackets and rebates and, with domestic fuel prices having risen above the R20/l level, there would also be no relief. increase in the general tax on fuels or the tax on the Road Accident Fund.

Nonetheless, Godongwana argued that restoring fiscal sustainability would require continued spending restraint and reforms to boost medium-term growth, while announcing that the government intended to achieve a primary surplus by 2023/ 24, a year earlier than expected in the MTBPS 2021.

No date was set for the implementation of the new fiscal anchor, with the National Treasury only confirming that a review of possible anchor variables was underway and had yet to be concluded.

Due to ongoing fiscal consolidation, the deficit is expected to improve to 5.5% of GDP in 2021/22 before narrowing to 4.5% by 2024/25, while gross loan debt is expected to stabilize at 75.1% of GDP in 2024/25. , a year earlier and lower than forecast in the MTBPS 2021, which indicated a peak of 78.1% in 2025/26.

“To ensure that these benefits are secured in the future and that the debt burden does not return to an unsustainable path, the National Treasury is assessing the potential for a stronger fiscal anchor.

“Over the next year, options will be considered for introduction into the 2023 medium-term expenditure framework period,” the budget review says.

Various variables were considered, including establishing ceilings between debt and gross domestic product (GDP) or between spending and GDP.

Despite the consolidation, gross loan debt is expected to increase further to reach R4,690 billion, or 72.8% of GDP, in 2022/23, before stabilizing at R5,430 billion, or 75.1% of GDP. GDP, in 2024/25.

Over the medium term, debt service costs are expected to average R333.4 billion per year and at R1 trillion over the period will be equal to what the government spends on social development and only slightly below 1,300 billion rands which will be directed towards spending on learning and culture.

The fiscal outlook was subject to significant risks, Godongwana warned, pointing in particular to the possibility of rising civil service wage costs, as well as the risk posed by state-owned enterprises in poor financial health.

A new round of collective bargaining will begin in March.

However, growth prospects remain weak, despite a slight upward revision to the National Treasury’s previous projections.

Godongwana announced a growth forecast of 2.1% for 2022, during which the economy is expected to return to pre-pandemic output levels. GDP growth is expected to average 1.8% over the next three years.

No new growth-enhancing reforms have been announced, with the minister re-emphasizing the strategy of boosting growth by stimulating demand through infrastructure investment, employment programs, tax and social transfers that will stimulate household consumption.

He also highlighted the need to ease skill and power constraints and upgrade network industries to support an increase in the productive capacity of the economy.

“Work is underway to expedite the approvals required to register integrated power generation plants, review the policy framework and processes for work visas, complete the spectrum of analog-to-digital migration and auctions, and eliminate the backlog of water use licenses,” the Treasury said. in a presentation.

Deputy Minister of Finance David Massondo indicates that the current growth outlook takes into account progress in the implementation of structural reforms.

However, rapid and sequenced implementation on several fronts was needed to create the conditions for a much higher level of private investment conducive to growth.

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