Wednesday, 28 October 2020

Cape Town: As a result of the devastating impact of the Coronavirus pandemic, South Africa’s economy is expected to contract by 7.8 % this year in real terms.

The National Treasury said this in its Medium-Term Budget Policy Statement on Wednesday.

This comes after COVID-19 and the measures taken to protect public health resulted in steep declines in consumption, investment and exports.

“GDP growth is expected to rebound to 3.3 % in 2021, and to average 2.1 % over the medium term. Based on this projection, the economy will only recover to 2019 levels in 2024.

“The sharp downturn in the domestic economy follows a decade of economic stagnation, complicating South Africa’s recovery,” said National Treasury.

It said over the past 10 years, real GDP growth averaged 1.4 %, while the population grew by 1.6 % per year.

“In this context, there is a need to forge a national consensus through a social compact that addresses both short- and long-term structural growth challenges.

“In recent months, government, business, labour and civil society have developed an economic recovery plan. Recognising that many plans fail to translate into action, the Presidency and the National Treasury have established Operation Vulindlela, an initiative to accelerate effective implementation of structural reforms to boost the rate of sustainable economic growth.”

Inflation forecast to fluctuate around 4.5%

Headline inflation is expected to fluctuate at the lower end of the 3 to 6% target range, the National Treasury said on Wednesday.

As Finance Minister Tito Mboweni tabled perhaps the most difficult Medium-Term Budget Policy Statement in years, due to the devastating effects of the COVID-19 pandemic, the National Treasury announced that goods and services inflation have broadly declined due to weak demand and falling oil prices.

“Inflation is forecast to fluctuate around the 4.5% midpoint over the medium term in line with moderating inflation expectations.

“Below-potential economic output and weak imported inflation are also expected to keep inflation contained.”

Retail, alcohol, tobacco and leisure sector decline due to low consumption

The National Treasury said household expenditure has evolved in line with lockdown restrictions, with high-contact, consumer-facing sectors (retail, leisure, alcohol and tobacco) experiencing a sharp drop due to COVID-19 containment measures.

“Conversely, higher spending on communication, housing and utilities is consistent with increased home-based work and leisure.

“Aggregate household consumption is expected to remain below pre-pandemic levels for some time. Consumption will be severely constrained by record job losses, steep declines in incomes and low confidence.”

The National Treasury said despite lower interest rates and inflation, demand for credit remains muted, implying that households expect prolonged economic weakness.

National Treasury looks at public sector wage bill to stabilise debt

Stabilising government’s debt will come with difficult decisions, and the public sector wage bill is the main area where government will impose reductions aimed at returning public finances to a stable position.

The National Treasury said this in its Medium-Term Budget Policy Statement (MTBPS) on Wednesday, in which it proposes steps to reduce the fiscal deficit and stabilise the debt-to-GDP ratio over a five-year period.

This as National Treasury looks to make spending reductions of R60 billion in 2021/22, R90 billion in 2022/23 and R150 billion in 2023/24 – mostly falling on compensation.

“Large fiscal adjustments and an improving economic outlook will narrow the budget deficit by 7.3 percentage points of GDP over the medium-term expenditure framework (MTEF) period, and by an additional 1.8 percentage points in the subsequent two years.

“The aim is to reach a main budget primary surplus by 2025/26. This target is expected to result in debt stabilising at 95.3% of GDP in the same year.”

The National Treasury said the impact of the COVID-19 economic contraction on South Africa’s public finances will be felt for years to come.

Although the economy has begun to recover from the hard lockdown, tax revenue in the current year is projected to be R8.7 billion lower than the June estimate.

“Gross debt is projected to reach 81.8% of GDP in the current year, up from 65.6% projected in February 2020.

“Returning the public finances to a sustainable position requires large adjustments. Government spending remains too high for the tax base – and this gap has likely increased as a result of the 2020 recession.”

In its Fiscal Risk statement, the National Treasury said over the last 15 years, public-service compensation spending has grown at an unsustainable rate that is nearly 1.5 percentage points faster than the rate of growth of GDP, largely because of increases in average remuneration.

The result is that public-service compensation now accounts for the equivalent of 11% of GDP, up from 9% in 2004/05.

“Without a major reduction in public spending, debt will continue to accumulate and interest payments – which already consume 21 cents of every rand of main budget revenue – will crowd out other spending.

“Debt stabilisation involves difficult decisions, with short-term costs for the economy and the fiscus.

“To partially offset the effect of the spending adjustment, government has weighted the largest share of reductions to the wage bill, while supporting capital grants and the Infrastructure Fund.”