The 2022 Medium-Term Budget Policy Statement (MTBP), delivered by Minister Enoch Godongwana on Wednesday, offers hope for South Africans. Taxes are not expected to rise over the medium term. The social relief of distress grant was extended by another 12 months. More money was allocated to build, improve and replace infrastructure. More money was allocated to combat corruption and to hire more police officers to combat crime. And the balance sheets of some state-owned companies will improve, allowing them to focus on building and maintaining roads, generating and transmitting electricity, moving more people and goods by rail, and getting more goods through our ports quicker and cheaper. Government debt will likely not become unsustainable in the medium term. 

But, many substantial risks remain to government’s revenue and expenditure projections in these uncertain times. 

Higher prices and higher nominal incomes, together with a waning commodity price boom, have led to higher-than-expected corporate tax revenues, which has led to a substantial revenue windfall: revenues are forecast to be R83.5 billion higher than the 2022 Budget Speech forecast. This has allowed National Treasury to project that taxes won’t increase in the foreseeable future, that spending on infrastructure and the social wage will increase, and that fiscal policy will be sustainable. 

The government extended the social relief of distress grant by another year, until March 2024, which will bring relief for many South Africans, given that years of slow growth, together with the fallout from the COVID-19 pandemic and cost-of-living increases have exacerbated already unacceptable rates of unemployment and poverty. 

This revenue windfall also allows government to make progress towards stabilising the government debt-to-GDP ratio, thereby ensuring a return to sustainable fiscal policy. Treasury is now projecting that it will run a primary surplus of 0.7% by 2024/25, while gross loan debt is projected to peak at 71.4% in 2022/23, which is lower, and sooner, than projected in last year’s MTBP Statement and the 2022 Budget Speech. 

A large part of the revenue windfall will be used to increase spending on infrastructure, which should be welcomed, because these investments have the potential to make inroads into service delivery backlogs. Furthermore, high investment will also help to achieve a high rate of economic growth: low and volatile public and private investment help explain SA’s low average economic growth from 2009 onwards. Spending on infrastructure is projected to grow by almost 69% over the medium term, making it the fastest growing spending component by economic function. 

The Minister also announced that government will take on between one-third and two-thirds of Eskom’s total outstanding debt of R400 billion, thereby adding up to R267 billion to government debt. This relief is meant to ensure that Eskom will be able to complete its restructuring and focus on securing and expanding the supply of electricity. This move was not unexpected or unwelcome, given the reaction of financial markets to the MTBPS. But crucial details, such as the exact amount of Eskom’s debt that government will take on, and the implications that this will have for government’s finances, were deferred to next year’s budget. 

Eskom was not the only state-owned company to benefit from the revenue windfall: Sanral, Denel and Transnet will receive R30 billion to strengthen their balance sheets, which will allow them to focus on their core operations. But, as the Minister indicated, these companies will have to show that their business models will be financially sustainable from now on.

Significant macroeconomic, expenditure and contingent risks to the economy and the fiscal outlook remain. If any of these risks materialise, the fiscal outlook will worsen substantially. 

The revenue windfall that allowed for government’s largesse is unlikely to last much longer, given that Treasury revised its growth forecast downwards, and that commodity prices have probably peaked. One reason why Treasury revised its growth forecasts downwards is because of the effects of sustained load-shedding on economic activity. There is also no end in sight: Eskom’s chief operating officer warned earlier this month that load-shedding may last another 18 months. Worryingly, neither the Minister’s speech nor the supporting full MTBP Statement provided any new details about how Eskom’s restructuring and unbundling is proceeding, which government sees as key to ensuring the stability of the country’s electricity network.

Furthermore, public sector unions and government have still not reached an agreement about public sector pay increases: government is offering a 3% increase, while unions are demanding increases of between 6% and 10%. Given the importance that Treasury attaches to dealing decisively with the growth of the public sector wage bill to restore fiscal sustainability, it is concerning that apparently very little progress has been made in these wage negotiations since February’s Budget Speech. And, with decreasing political support, the government is unlikely to want to alienate one of its key constituencies, and 3% may not be its final offer. But, as the Minister pointed out, if public sector workers’ salaries increase by more than 3%, spending will need to be reprioritised. And, as Burger, Siebrits and Calitz  have shown, the South African government is more likely to cut capital and infrastructure spending than current spending when faced with difficult decisions about the prioritisation of spending, which will adversely affect the growth prospects of the economy. 

The future trajectory of interest rates will also become increasingly important. Central bank policy rates will probably increase further in the coming months, both here and abroad, as central banks try to combat persistently high inflation. These interest rate increases will increase debt service costs, which may lead to further spending reprioritisations, or greater borrowing. Higher interest rates will also dampen private spending, putting further strain on Treasury’s projections of economic growth and therefore government revenue growth. 

The Reserve Bank will probably be very aggressive in increasing interest rates, not only because inflation has been above 6% since May, but because the Reserve Bank’s governor has stated that the Bank intends to target the lower limit of the inflation target range of 3-6%. This implies that the SA Reserve Bank is now pursuing an even lower inflation target, given that it started aiming for the midpoint of the target range from about 2016 onwards. To date, government has been relatively silent on this issue, despite evidence from several economic studies that very low inflation rates only contribute marginally to economic growth in high-income countries, let alone middle-income countries like South Africa. 

I am not disputing that lower inflation is associated with higher levels of consumer welfare, nor that lower South African inflation may lead to less long-run exchange rate volatility. I am also not disputing the appropriateness of the Reserve Bank’s efforts to combat inflation to ensure that inflation expectations remain anchored to the inflation target. But the appropriateness of the Reserve Bank’s intention to now target 3% inflation should be discussed, given how it will likely affect interest rates and debt services costs, and given that the government, not the Reserve Bank, sets the inflation target. 

While central banks are increasing their policy rates to combat inflation, debt service costs may increase sharply, which may lead to fiscal dominance, which has been referred to Soobyah and Viegi in a recent South African Reserve Bank Working Paper . Under fiscal dominance, concerns about the effects of interest rate increases on the sustainability of fiscal policy override other monetary policy concerns, such as combating inflation. While the risk of fiscal dominance seems low, the risk should at least be acknowledged, given the global extent of high inflation, high public debt ratios, and increasing central bank policy rates. 

The extension of the social relief of distress grant will bring financial relief to many South Africans. This grant’s expiration date has been extended three times since its introduction in 2020, and there is no sunset clause for it. I therefore believe that this grant will probably become permanent in the medium term. The grant is now set to expire in March 2024, which is before the 2024 Budget Speech and 2024 general election. It will therefore be an electoral boon for the ANC if government announced that the grant will be extended indefinitely. But, as the Minister noted, this will require higher revenue, while spending will have to be reprioritised. Once again, capital and infrastructure spending will likely bear the brunt of any such adjustments. 

Finally, the improved fiscal outlook also depends crucially on improved financial performance of state-owned companies. If this does not improve, and there are no further bailouts of these companies, will government, as stated in the 2021 MTBP Statement and 2022 Budget Speech, sell non-strategic state-owned companies? While the current revenue windfall has allowed government to allocate funds to improve the balance sheets of state-owned companies, there is no guarantee that their financial performance will improve over the medium term. The 2022 MTBP Statement seems to take this for granted, and is silent on the sale of underperforming non-strategic assets, which is concerning. 

Government has made substantial progress towards restoring fiscal sustainability during trying economic times, for which it should be commended. However, some of this is down to timely good fortune. One element of good fortune was the release of rebased GDP estimates by Stats SA in 2021, which increased the size of 2020’s GDP by 11%, and led to large downward revisions of debt and deficit ratios. Other elements of good fortune include the commodity price boom and strong revenue growth, associated with higher prices and higher nominal incomes. Wisely, the government has not used its temporary revenue windfall to permanently increase spending.