We share our view on the key fiscal areas we are watching pre and post budget 2021. A detailed post-budget update will follow in mid-March 2021.
A sliver of good news
In a year characterised by the COVID-19 pandemic and resultant devastation to the economy, there was a slither of good news on the country’s fiscal position. This came in the form of tax revenue that had remained relatively resilient in an otherwise unsupportive domestic environment. The question that has remained a constant in our robust discussions remains: Will this temporary reprieve result in any long-term benefits for a fiscus in desperate need of resuscitation?
Tax revenue collection not as weak as feared
Fiscal year-to-date tax revenue collections surprised many with total gross revenue showing a decline of -10.6% relative to the MTBPS target of -17.9% (see Graph 1). Tax revenue collected for the full fiscal year could potentially surpass expectations by more than R100 billion. The relatively resilient revenue is largely underpinned by robust Value Added Tax (VAT) and, surprisingly, Corporate Income Tax (CIT) underscoring National Treasury’s conservative estimates and additionally supported by the following factors:
- High commodity prices, which in turn supported mining company profits;
- The rebound of economic activity from a weak second quarter; and
- The end of COVID-19-related tax relief measures.
Graph 1: Revenue appears resilient under turbulent circumstances
*as at 31 December 2020 | Source: National Treasury, Futuregrowth
Unsurprisingly, Personal Income Tax collection is still alarmingly weak
Conversely, a worrying trend in Personal Income Tax (PIT) has persisted since the onset of the pandemic. While fiscal year-to-date figures are better than Treasury’s expectations, PIT receipts (which make up a significant 40% of total revenue) remain muted relative to both their long-run average and the recovery evidenced in the other tax sources (see Graph 2). This is partially explained by lingering job losses despite the opening up of the economy following the hard lockdown in the second quarter of 2020. Moreover - bearing in mind the strong positive relationship between economic growth and revenue collection - the current low growth environment coupled with a benign inflation outlook suggests that revenue collections are likely to remain under pressure. While the short-term upside surprise in revenue is certainly welcomed, a deeper look at revenue collection does little to ease our concerns relating to the long-term fiscal position.
Graph 2: Recovery in Personal Income Tax is lagging behind CIT and VAT
Source: National Treasury, Futuregrowth
Total government expenditure is aligned with the budget - for now
On the expenditure side, as of December 2020, total government spending remains in line with the historical seasonal trend, coming in at 72.1% of the total estimate for the 2020/21 fiscal year. However, as we approach the February 2021 budget, we remain wary of mounting expenditure pressures. These largely stem from the financial bailouts of State Owned Enterprises (SOEs) and ongoing negotiations on the public sector wage bill. We still believe that targeting the wage bill is the most appropriate area for curbing the budget deficit. The cumulative 40% real increase in wages over the past twelve years came without productivity gains and resulted in the crowding out much-needed growth-enhancing capital expenditure. However, the execution risk of the proposed expenditure cuts remains a haunting concern.
Too little to ease the debt burden, yet
Despite the short-term relief offered by the improved revenue outlook, the debt burden remains an enormous pressure point, with the primary balance remaining in negative territory and no significant stabilisation of the debt burden in sight over the medium term. Taking into account the revenue over-collection of R100 billion into our fiscal framework points to the gross debt-to-GDP ratio reaching 90.2% in 2023/24, just shy of National Treasury’s projected 92.9%. While our estimate is lower, we are loath to see this as a positive indicator, given the steep upward trajectory of the debt profile (see Graph 3). The deterioration of the South African fiscal position thus far still presents many red flags which continue to signal the possibility of a public sector debt trap. An in-depth look at our concerns regarding this issue can be found in an article published late last year titled The state of South African public finance: How close are we to a debt trap? produced by the Futuregrowth Interest Rate team.
Graph 3: South Africa’s debt profile remains elevated
Source: National Treasury, Futuregrowth
More needs to happen to produce a sustainable fiscal improvement
Our analysis suggests that the economy would need to grow at an average of 3.5% over the medium term (beyond the 2020/21 fiscal year) before we see any significant stabilisation in the debt burden. Bearing in mind that in the five years preceding the COVID-19 pandemic South Africa had an averaged GDP growth of an anaemic 0.8%, growth of the required magnitude is a tall order. Therefore, without any long-term targeted interventions that address the lacklustre growth environment and mounting expenditure, we find it hard to become overly optimistic – even with a possible reduction in the weekly issuance of government bonds, as touted by the market. While we welcome the temporary revenue overrun reprieve, we remain concerned about the longer-term state of the fiscus. A more concerted effort is required to turn the fiscal ship around.
A more detailed note on our thoughts will follow after the tabling of the budget on 24 February 2021.