MTBPS Review: Retreat from planned fiscal consolidation; deficit estimated to remain at 3.9% of GDP over the medium term framework

24 Oct 2017

Annabel Bishop

Chief Economist

The 2017 Budget identified the main risks to the fiscal position over the medium term.

Figure 1: Macroeconomic projections, 2015-2019
The 2017 Budget identified the main risks to the fiscal position over the medium term to be “the macroeconomic outlook, budget execution, policy uncertainty and financially distressed state-owned companies.” Since the Budget was tabled in February 2017, some of these risks have materialised. Namely, the economy is underperforming, partly as a function of heightened perceived policy and political uncertainty, and several state-owned companies are financially distressed. Key risks that remain relate to budget execution which in turn is linked to this year’s civil service wage negations.  
With the economy having entered a technical recession in Q1.17 and more recent high frequency indicators suggesting only modest levels of activity, National Treasury in its Medium Term Budget Policy Statement (MTBPS), lowered its real and nominal GDP growth projections (see figures 1 and 2). The Treasury noted that the forecasts are based on the “status quo” prevailing. Specifically, real GDP growth was revised down to 0.7% in 2017 from 1.3%, and over the medium term is envisaged to rise to just 1.9%. These forecasts are aligned closer to those of the SARB and of the major international authorities (see figure 2). 
The downward revisions to the growth forecasts was ascribed mainly to domestic factors relating to the effects of a “significant deterioration in business and consumer confidence over the past year” (see figure 3). According to National Treasury, factors affecting confidence levels include “(d)elays in finalising key regulatory processes, as well as a pattern of poor governance in several large state-owned companies”. Prolonged policy uncertainty raises the risk of entrenching confidence levels, and therefore economic growth, at low levels.
The MTBPS highlights that faster and sustained economic growth is vital to improving the fiscal outlook and recommends the “(r)apid implementation” of measures aligned with the National Development Plan (NDP). Additionally, the MTBPS outlined that confidence boosting measures would include restoring fiscal policy sustainability; managing risks associated with state-owned enterprises (SOEs) and finalising key legislative and policy processes. However, Finance Minister Gigaba admitted that the “greatest challenge remains effective implementation and slow pace in many instances.” 
Figure 2: Real GDP growth, annual forecasts % change

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