Confirmed: nothing much has changed since October

There was hope that Budget Review 2020 would give SA some good news. The preceding fiscal address from finance minister Tito Mboweni — the medium-term budget policy statement (MTBPS) four months ago — sounded warning bells about the country’s fiscal situation but also made sounds about good news to be delivered this time around.

There were some positive announcements. After media coverage of analysts predicting an increase in VAT, the dreaded rise did not materialise. In fact, the finance minister announced some tax relief for consumers.

Personal income taxes are adjusted annually to compensate for inflation. This time, taxpayers were given aboveinflation relief on personal income taxes. According to the Treasury, those earning R265,000 a year will see their income tax reduced by more than R1,500 a year.

This decision was unexpected given the pressures on the fiscus. It is likely that Mboweni looked at his calculations from an economic growth perspective and realised a small cut in personal income tax might give the local economy a bit of a boost.

On the expenditure side, the Treasury announced that it is planning for R160bn in savings on the public-sector wage bill over three years. This will enable fiscal authorities to structure a turning point in the fiscal deficit.

The public-sector wage bill has increased significantly over the past decade in nominal and real terms. It is a major expenditure point for the state, with little flexibility in making reductions to the overall cost.

The envisaged R160bn in savings has yet to be agreed with labour unions. The outcome of this process, which will entail renegotiating existing wage agreements — could be far smaller than R160bn.

With little flexibility on the expenditure side of the fiscal equation, the government is reliant on buoyant revenue. But this is not materialising due to the slow pace of economic growth, now and over the forecast period.

The fiscal balance — the difference between spending and income — provided some of the worst news. The budget balance is expected to balloon to 6.8% of GDP in 2020/2021, a departure from the figure of 4.3% presented a year ago. The proposed fiscal deficit will also be the largest since 1992.

The widening deficit is bad news for the country’s debt dynamics. A continued large discrepancy between income and expenditure is resulting in a deteriorating public borrowing profile. Meanwhile, SA’s debt obligations continue to rise, with no turning point anytime soon.

The deteriorating debt situation is far from encouraging when considering SA’s sovereign ratings. Moody’s Investors Service — the only major ratings agency that still provides SA with an investment-grade rating — is set to review this assessment at the end of March.

Moody’s takeaway from this budget will not be encouraging.

Despite plans for reduced spending on staff, the Treasury has made no real improvements to the budget balance and debt projections. Any calculations Moody’s makes will be similar to four months ago. The current fiscal situation is not much different from that provided in the medium-term budget.

The key issue is to restate the above: nothing much has changed since October 2019. The medium-term budget policy statement was a warning from the Treasury over the direction SA is headed if changes are not implemented quickly.

The Budget Review does show intentions to reduce public-sector costs, but nothing tangible. The document largely reiterates the reforms proposed last year, with limited progress on these changes. Many analysts will look at the budget speech and have a more favourable view of it compared to the medium-term budget policy statement. This cannot be because the numbers look better; it is probably because they are by now familiar.

The slow progress in righting the fiscal ship is a concern. It is clear that much faster economic growth will not materialise anytime soon, so analysts know improvement needs to come on the expenditure side, and it is here where progress is slower than desired.

The finance minister will rely on many things going his way — public-sector wage talks, reform at Eskom and a marked improvement in collections by the SA Revenue Service — to realise his goals for 2020/2021.

Most South Africans will be happy that VAT has not increased, and that personal income taxes will be a little less onerous. However, aiming for some smiles is likely not a sustainable approach to support the local economy. Bigger changes are needed, and they are needed yesterday.

Krugel is chief economist for PwC Africa, and Viljoen is an economist at PwC SA.