Budget: A glimmer of hope?

Source: Prof Johan Willemse, SAPPO News February 2021, photo credit: Criteo

The government budget tabled by the minister of finance Tito Mboweni on Wednesday, gave a glimmer of hope that the ruling ANC government at last understood that you can’t go on borrowing money to feed ever growing government expenditure.

The minister outlined a budget where non-interest expenditure of government will not grow during the next three fiscal years, while with a growing economy (and growing taxes), the outlook is to stabilise government debt as percentage of GDP below 90%. However, it is still much larger than the norm for developing countries of 60% debt to GDP.

The issue is to service the debt. The current outlook improved considerably since the medium-term budget was tabled in October 2020. The risk was that government debt would continue to grow as a percentage of GDP.

This directly led to a further downgrade in our credit ratings, as ratings agencies were not satisfied with the plans tabled. I suspect the current budget is a little more credible and confirms government resolved to stabilise the spending and debt ratio.

The bond market also reacted favourably, as it was indicated that the budget deficit that needs to be financed, is smaller than anticipated and the amount of bonds to be sold, will be smaller. This is great news, as the government absorbed most of our domestic savings during the current fiscal year, leaving very little savings for investment in the economy. Although the budget talks of more investments in infrastructure, the budget is still heavily skewed towards consumption expenditure.

The immediate market reaction was that the rand exchange rate strengthened a little towards R14,50/$, as investors welcomed the news, then it weakened again. The government also decided not to implement the previously mentioned R40 billion in extra taxes this year, while also decreasing company tax rate to 27%. Personal income tax brackets will be increased, which will provide R2,2 billion tax relief. However, the levy increase of 27 cents per litre on fuel is not good news for agriculture, as we also expect increases in the fuel price during the next few months, given a rising world oil price.

Listening to the minister and working through the Treasury documents, my summary is that this is the first time in many years that some economic sense is evident and it supports the government’s utterances to grow the economy. Government expenditure is budgeted to only grow by 3,3% over the next three years towards 2023/24.

Given a better economic growth outlook over the period, tax income is expected to increase from R1,36 trillion this year (R689,8 billion will be borrowed) towards R1,712 trillion in three years (requiring borrowing of R378 billion), stabilising/reducing the budget deficit.

The big question remains: Will government have the resolve to stick to the budget and not increase spending? We know that the government is good with plans but very poor with implementation!

The problem still remains that a large part of government expenditure will go to servicing debt, social services and grants and government employee salaries. The budgeted government expenditure is R2.02 trillion rand, of which R1,2 trillion is to be spend on social services. Only R207,5 billion is budgeted for economic development in 2021/22.

There was no additional money budgeted for SOE’s, only for the Land Bank that will receive R7 billion over three years, to stabilise it and to fulfil its developmental mandate. It is clear from the minister that  the government wants the Land Bank to focus more on emerging farmers, which will not lower the risk of non-performing loans (as most of the new farmers will not own the land).

R816 million was budgeted to establish new landowners through the restitution process and the minister also announced that 10 000 “experienced” agricultural extension officers will be employed to support the new farmers. I really think this is unrealistic and amounts to window dressing land reform.

Be aware, extra money was budgeted for SARS to increase audits and tax collections. Make sure your tax affairs are in order!

The South African Pork Producers’ Organisation (SAPPO) coordinates industry interventions and collaboratively manages risks in the value chain to enable the sustainability and profitability of pork producers in South Africa.