What's Happening?

National budget preview: Charting the seven Cs

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Highlights:

  • Commodity prices catapult corporate revenues: Although prices of South Africa’s (SA) exported commodities have rolled over since their peak, prices have bounced off their lows and remain higher than before the onset of the COVID-19 pandemic. Higher mining revenues are expected to buoy corporate income taxes (CIT) in the near to medium term, but the likely temporary nature of the commodity price windfall heralds a warning for introducing permanent expenditure line items that are not matched with an equivalent permanent revenue stream. Even though the rate of deterioration in SA’s fiscal situation has abated markedly, with no additional permanent revenue structures in place to cater for rising expenditure risks, risks to fiscal consolidation remain elevated in the medium to longer term.
  • Consolidation trends could improve in the near term: SA’s fiscal and debt situation has improved on account of the recent commodity price boon underpinning stronger revenue growth. This should allow for progress in government’s fiscal and debt ratios in the near to medium term. Nonetheless, potential slippage on the government wage bill, a larger and more permanent form of basic income support and additional bailouts to fragile state-owned enterprises (SOEs) remain key risks to fiscal consolidation and debt stabilisation in the medium to longer term.
  • Cost of servicing debt remains elevated:While the pace of debt accumulation is likely to slow, SA’s overall debt burden and associated interest bill remain high. For every R1 of revenue, nearly 20 cents is directed towards the cost of interest on government’s debt pile, which crowds out spending on essential policy priorities.
  • Containing the civil servant wage bill remains an upside risk to expenditure: Government has shown its resolve to curb the wage bill by refusing to pay the increase in the third year of the 2018 multi-year wage agreement. Yet, it reneged on its firmer stance against unions’ demands by granting a generous cash bonus, which is pencilled in for the next fiscal year as well. Moreover, government workers are unlikely to settle for a wage increase that comes in below inflation, posing upside risk to the overall wage bill despite restraint shown on headcount.
  • Curbing the rise in equality through an extension in social grants: Lower levels of social unrest and higher than expected household consumption spending during 2021 signal the success of the Social Relief of Distress (SRD) grant in reducing inequality and alleviating poverty. However, introducing a more permanent expansion of the grant system may necessitate a more permanent revenue stream to limit the drag on the fiscus.
  • Contingent liability risks are a function of unbudgeted bailouts: The extent to which government digs in its heels to curb additional expenditure on unstable SOEs will determine how successful it is in stabilising the debt ratio in the medium to long term.
  • Credit-neutral budget outcomes expected in the near term: The likelihood of smaller government deficit and lower government debt ratios for the current fiscal year and next should alleviate rating agency concerns in the near term. Low trend growth, sluggish reforms and medium-term fiscal risks nevertheless paint a more bearish picture for sovereign ratings in the medium to longer term.

Please click here to find the research note: National budget preview: Charting the seven Cs