On the 2021 Budget

Image: Nataliya Vaitkevich.

The 2021 South African National Budget confirms the Treasury’s firm resolve to reverse the rising debt burden while adjusting to a lower growth and inflation outlook. The outcome is a brutal constraint on spending for the period ahead.

The fiscal consolidation plan was set out in the 2020 Medium Term Budget Policy Statement (MTBPS). It projected a Gross Domestic Product (GDP) decline of 7.8% in 2020 and a R310 billion shortfall in revenue for the fiscal year – and a consolidated budget deficit of 15.7% of GDP. Additional COVID-19 related spending on health services and social relief was announced for 2020/21, but expenditure growth for the Medium Term Expenditure Framework (MTEF) period ahead was lowered to just 1.6% a year – well below inflation.

The revenue outcome for 2020/21 will be about R100 billion higher than anticipated in the MTBPS. For the three years ahead, revenue will be R196 billion higher than the October projection. Against expectations, no new taxes were announced, and personal income tax relief was positive in real terms for the first time in several years. However, Minister Mboweni has kept closely to the MTBPS consolidated spending plans. The revenue gain largely goes to lowering the deficit and debt projections.

For 2021/22, compensation of employees will be R650 billion, marginally higher than the MTBPS R639 billion estimate. For the MTEF period, remuneration will increase by 1.2% a year, whereas the MTBPS projected just 0.8% a year. This near-freeze on government wages is the centrepiece of the fiscal consolidation plan, but it is not the only element. Social grants and other transfers to households will decline over the period ahead. Adjusted to exclude the 2020/21 COVID-19 relief payments, household transfers will grow by just 2.5% a year. Capital spending will increase by 9.2% a year, but even these allocations have been lowered relative to the MTBPS projections.

Macroeconomically, the Budget will contribute to keeping inflation near the lower bound of the target band. It will ease the fiscal pressure on capital markets. Tax relief will assist households and firms. The intent is to support business investment and facilitate economic recovery.

But the Treasury’s outer year growth projections remain cautious – just 2.2% in 2022 and 1.6% in 2023. The hope, no doubt, is that the recovery will be stronger.

Implementation of a vaccine programme is identified by the Treasury as a key step towards a more confident recovery. Beyond this, we have to look to Operation Vulindlela. Jointly managed by the Treasury and the Presidency, Vulindlela is an initiative aimed at unblocking barriers to growth across all of government, by focusing on key structural reforms. It is the centrepiece of the President’s economic recovery plan, strongly focused on the energy sector and other network industries, infrastructure investment and employment generation.

Parts of the recovery strategy are in place, and will show results during 2021.

The employment initiative includes job opportunities at the minimum wage as teaching assistants and other support functions at schools for 300,000 young people. The first phase has already been implemented, and the Budget sets aside funding for continuation in 2021/22.

The winning tenders have now been announced for eight emergency electricity generation projects, and two further renewable energy bid windows have been announced.

A revised scarce skills list has been announced.

But most of the Vulindlela reforms will take several years. They require regulatory processes (spectrum release, processing outstanding water use licence applications, establishment of a transport economic regulator), institutional restructuring (separation of Eskom’s business units, concessioning of Transnet branch lines, corporatisation of the Ports Authority, establishment of a national water resources agency) and complex systems investments (an e-visa regime, addressing deficiencies in municipal water and electricity network maintenance).

As Robert Skidelsky argues in a recent Project Syndicate paper, “recovery” needs to be pursued ahead of “reform” – the shock to economic activity and uncertainty about the future that have accompanied COVID-19 and the lockdown need to be countered now, structural reforms will not re-generate the jobs and incomes lost last year.

As it happens, the Treasury’s projections for growth in 2021 are probably too cautious. Several analysts have already signalled higher expectations for private sector investment, and inventory restocking will provide a boost after large depletions last year. A strong recovery in advanced economies in the second half of the year will add to the growth momentum in developing countries.

If the fiscal consolidation is necessary to reverse the debt trend, then more has to be done to stimulate private investment, keep the cost of capital low and open up informal and small business opportunities.

But in its spending plans, government also needs to make the tough choices that must accompany real reprioritisation and reorganisation of service delivery.

Minister Mboweni has talked of “zero-based budgeting”, and the Treasury stated last year that in-depth “expenditure reviews” would be undertaken jointly with the Department of Planning, Monitoring and Evaluation. Yet there is no indication in the 2021 Budget of programmes or public entities that will be closed, or merged; there are no functions or public enterprises earmarked for transfer to the private sector, or set to shed redundant staff or improve cost recovery from users.

Across-the-board expenditure ceilings and wage restraint can deliver fiscal consolidation for a year or two. Effective action to limit corruption and waste will also assist.

But longer-term restructuring requires a hard look at what government does, which programmes should be continued or expanded, which should be closed or reorganised, and how public employment and earnings should be adjusted over time.

Wage restraint may be necessary in government departments, but then it should extend also to public entities, state-owned companies and municipalities.  If new public programmes or agencies are needed in some areas, a spotlight also has to be cast on those activities or entities that might better be organised along market lines and financed independently. Perhaps this is work in progress, but the 2021 Budget documentation provides disconcertingly little evidence of the deep institutional reorganisations that would make fiscal consolidation not just a debt management imperative but also a path towards more efficient public service delivery.