Higher revenue and fall in deficit are weighed down by jobless numbers and government borrowing
Finance Minister Enoch Godongwana is likely to show a substantially improved fiscal position in Thursday’s 2021 medium-term budget policy statement relative to previous projections. We expect main budget revenue to exceed the initial estimate by R130bn in 2021/2022, reflecting the positive effect on domestic income of high export commodity prices. There is a material degree of forecast risk, since the fiscal year still has some way to run.
At the same time, the primary budget balance is expected to improve from a deficit of -1.9% of GDP in 2021/2022 to -0.9% of GDP in 2022/2023, before switching to a small surplus of 0.3% of GDP in 2023/2024. This assumes the fiscal consolidation path plotted in February 2021 remains intact, except for additional social grant spending, which we have pencilled in at about 0.5% of GDP.
A revised financing requirement of R450bn is now expected. Even so, this amounts to 7.4% of estimated GDP. Further, given large government loan redemptions in 2022/2023, in addition to the budget deficit projected above, a borrowing requirement including redemptions of R512bn is expected in 2022 . The flipside of this development is material crowding out of private sector investment. SA Reserve Bank data shows private sector net capital formation fell R76.3bn in 2020.
Admittedly, the projected longer-term trajectory of the debt ratio is relatively flat compared with the past decade. But here’s the thing: significant fiscal consolidation execution risk lingers. To achieve the projected improvement in the budget balance above, the government’s total expenditure must decrease by about 2.25% of GDP between 2021/2022 and 2023/2024. This is not easy to achieve given current demands on the government’s resources.
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