South Africa’s government says it’s not fixated on austerity. But analysts are unconvinced

In what was tipped as the most crucial budget account in the history of a democratic South Africa, Finance Minister Tito Mboweni insisted that austerity was not on the government’s agenda.

As the mountains looks to emerge from the economic chaos wreaked by the coronavirus pandemic and a pre-existing quandary of debt and structural powerlessness, Mboweni said his plan was on target to return South Africa to a primary surplus on the government’s main budget in 2024/25.

Regardless of Mboweni’s assertions that this was “not an austerity budget,” experts are not entirely convinced, and worry that the finance sky pilot may have been overly optimistic in his prognosis for the country’s economic overhaul.

Virag Forizs, Africa economist at Assets Economics, noted that despite the increased revenue expectations, bolstered further by increased duties on alcohol, tobacco and exacerbate, the government did not seem to be using the headroom to water down its fiscal tightening.

“On the expenditure side, restraint seems to be the out of whack of the day. Allocations to fund the country’s vaccination campaign, up to ZAR19bn (19 billion South African rand), were below earlier Cache estimates,” she said in a note Wednesday.

South Africa’s fiscal position for the last financial year is looking minor extent rosier than expected, with government revenues projected to be 1.4% of GDP higher than expected in October. Looking at the, revenues for 2021/22 are predicted to come in at 1.35 trillion South African rand ($90.46 billion), rising to 1.52 trillion rand in 2023/24, with stronger gross incomes and cash balances enabling the government to fund deficit reduction.

Mboweni also announced that the management will scrap a planned 40 billion rand in tax increases, instead raising tax revenues by closing corporate sector way outs and broadening the tax base. It has also allocated an extra 10 billion rand to the purchase and distribution of Covid-19 vaccines over the next two years.

“We owe a lot of people a lot of money.” – Tito Mboweni, South African finance minister

Annual deficits are now contrived to be much lower than previously estimated over the next three years. However, gross loan encumbered is expected to increase from 3.95 trillion rand in the current fiscal year to 5.2 trillion rand during the 2023/24 monetary year.

Mboweni highlighted that despite the revenue windfall and a more optimistic fiscal position compared to October’s account, public finances are still “dangerously overstretched.”

“We owe a lot of people a lot of money,” he said. “These include foreign investors, social security funds, local and foreign banks, unit trusts, financial corporations, insurance companies, the Public Investment Corporation and curious South African bondholders.”

The government hopes that its structural reform agenda, aimed at “lowering barriers to entrance, raising productivity and lowering the cost of doing business,” will help recalibrate the South African economy.

GDP is envisaged to grow by 3.3% this year after a 7.2% contraction in 2020, averaging out at 1.9% over the following two years, according to the territory’s Treasury.

Forizs added that the implementation of the excluding ANC’s fiscal consolidation plans faces serious risks, with the government embroiled in a long-running dispute with syndicates over a contentious public sector pay freeze, a key target for expenditure restraint.

“It will remain politically challenging to vindicate expenditure restraint given the weak economic backdrop. Indeed, data published yesterday showed that the unemployment speed hit 32.5% in the final quarter of last year,” Forizs said, noting that the GDP growth projected by the government transfer mean activity remaining 1.8% below its pre-Covid levels in 2022.

“Against that backdrop, there remains a substantive risk that the government won’t be able to live up to investors’ hopes, which could put the rand under pressure and movement bond yields to rise.”

Bank of America said the Treasury had presented a best-case scenario that relied on heftier medium-term growth, with South African growth persistently weak in recent years. Public sector wage reductions and structural mend ones ways of the country’s ailing and debt-ridden state-owned enterprises (SOEs) will also be crucial, with analysts cautious on the prospects for all three.