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MTBPS 2020 - Pro-growth is the best solution say economists

29 Oct 2020

By Kevin Lings, STANLIB Chief Economist and Ndivhuho Netshitenzhe, STANLIB Economist

This year’s Medium-Term Budget Policy Statement (MTBPS) provided another sobering but realistic assessment of government finances, especially the rapid and unmitigated deterioration in key fiscal parameters during 2020. More importantly, it revealed that, without significant fiscal reforms and an improvement in economic growth, the government’s fiscal position will deteriorate further, quickly reaching a point where an outright crisis is inevitable. This would have severe implications for financial markets as well as the broader economy.

It is abundantly clear that without a sustained increase in economic growth accompanied by an increase in employment and an improvement in revenue collection and tax morality, the South African government is going to continue to struggle to meet its revenue targets. Without higher economic growth, tax collection will continue to dwindle, scuppering government’s attempts to meet its social and economic objectives.

As a direct result of the Covid-19 outbreak and subsequent lockdown measures, the South African economy is expected to record its worst growth performance in recent history, with GDP forecast to decline by -7.8% in 2020, after growing by only 0.2% in 2019, ending the year in recession.

The government has borrowed a staggering R554 billion more than it forecast just three years ago. And that is without solving any of the looming debt issues in the major State-Owned Enterprises (SOEs).

The projected increase in tax collection over the next three years might be difficult to achieve, given that it relies on a level of tax buoyancy that the country has never been able to sustain.

There is the implication that National Treasury estimates that government’s wage bill will decrease by R310.6 billion, mainly through wage freezes for management-level employees and much slower wage increases for other employment levels. This plan is ambitious, as its success will require buy-in from the broader public sector, including municipalities, SOEs and trade unions.

There is a clear risk that other SOEs will require additional government support over the coming years. This could effectively undermine valiant efforts to control the salary cost.

Overall, the deterioration in government’s fiscal position in recent years, including the rapid and alarming increase in debt, is especially damning considering the deterioration in SA’s socio-economic conditions, sustained low economic growth, record high unemployment, a record low savings rate, systematic downward revisions to the credit rating, regular electricity outages, a fragile water supply, the deterioration in public sector health and poor education outcomes.

National Treasury has revised up its 2021 GDP forecast from 2.6% to 3.3%, while the growth estimates for 2022 and 2023 are little changed, at 1.7% and 1.5% respectively. These growth estimates appear fairly realistic and achievable, but highlight the lack of vibrant economic growth.

Ultimately, there is no substitute for higher economic growth in resolving SA’s unfolding fiscal crisis. This can only be achieved through a concerted and co-ordinated effort to lift business and household confidence to improve private sector fixed investment, skills development and productivity – all of which is lacking in the MTBPS.

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