By Elna Moolman
As expected, higher-than-forecast revenues were partly used for a permanent reduction in the debt-GDP ratio and partly absorbed by expenditure increases.
The government was somewhat less conservative than we would’ve preferred amid elevated forecast and execution risk; its projections generally appear credible but the risks are biased to the downside.
Despite recent optimism about the near-term fiscal improvement, we suspect financial markets will still react positively to this Budget given:
1. The continued overarching commitment to fiscal consolidation, 2. the permanent reduction in the debt-GDP forecast trajectory 3. the sizeable lowering of weekly bond auction sizes (which not only directly eases pressure on the bond market but also arguably implies that the Treasury is quite confident about the feasibility of the proposed fiscal plan).
The fiscus has done as much as it could at this stage to stave off further rating downgrades, though ultimately this will depend on the execution of this fiscal strategy and the implementation of growth reforms. The Budget Review reports encouraging, albeit gradual, progress with the turnaround at Sars, while general economic growth and SOE reforms (outside of progress with energy reforms, still appear to be frustratingly slow.
The government still pursues fiscal consolidation via spending curbs (rather than tax hikes) and the desirable shift in the composition of spending (from consumption to capital) continues. Unsurprisingly, there were no tax hikes (apart from higher sin taxes that are offset by fiscal drag relief; fuel levies rise in line with inflation) and, apart from further research around the feasibility of a potential future wealth tax, strong signals that the Treasury generally wants to avoid future tax increases too. As expected, there is still commitment to the containment of the public sector wage bill, and new expenditure allocations (mainly for the SOEs, the public employment programme, and the temporary extension of the Covid relief of distress grant) were in line with expectations (and in contrast to earlier concerns among investors of larger increases in pro-poor spending in particular).
The government was reasonably conservative in its projections though not quite as much as we would’ve preferred given the elevated adverse risks. Critically, the gradual recovery to pre-pandemic levels in the revenue-GDP ratio (still only by around 2026, despite the shallower slump in FY20/21) exactly matches our expectations, and the Treasury’s nominal GDP forecasts are broadly in line with ours (and underpinned by reasonable real GDP and inflation assumptions).
However, it is somewhat less conservative on FY20/21 revenue assumptions and planning to use more of its cash reserves than we would have preferred at this stage.
The Budget should be positively received by financial markets. The Budget should, in our view, be slightly positive for equities insofar as it reiterates the commitment to fiscal consolidation, without a net change in the tax burden or further spending reductions.
The modest increase in pro-poor spending might be somewhat disappointing – though not entirely surprising - to retailers; despite the ongoing commitment to infrastructure spending, the construction sector will likely be disappointed by a further trimming of public sector infrastructure spending estimates (mainly owing to reductions by SOEs).
We expect SA bonds and the rand to view the budget in a positive light, though gains will still likely be limited until progress with growth reforms augment the constructive fiscal steps to ensure debt stabilisation.
Elna Moolman, Senior Economist at Standard Bank
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