Better gross revenue receipts and possible implications
In F20/21, SARS collected R38bn more in gross taxes than the revised estimate presented in the February 2021 Budget Review. The outcome compared to the February 2020 forecast is therefore approximately R174bn less than the initial forecast of R312bn. The outcome for non-tax revenues and spending will only be available at the end of April.
On the assumption that the outcome of the other variables in the calculation of the main budget deficit, including the nominal GDP assumption for Q1 21, is in line with February 2021’s forecast, the main budget deficit ratio improves from an estimated 12.3% of GDP to 11.5% of GDP.
Possible implications for F22/23:
The first effect is to raise the base for revenue receipts. In the Feb’21 forecast, the increase in the growth rate was forecast at 12.6%. The higher base could lower the main budget deficit forecast from 9.0% of GDP to ~8.2% of GDP if non-interest spending remains in line with the forecast.
If all remains unchanged, the size of the borrowing requirement could decline from R547bn to ~ R510bn.
What we are watching from here:
o Debt servicing costs: The steepening of the SAGB yield curve over the past month is expected to result in an increase in debt servicing costs, already estimated to amount to R270bn. This represents an increase of 16.3%y/y from R232bn in F20/21. The primary deficit could only approach zero in about three years if National Treasury is able to adhere to its spending forecast, which assumes the public sector wage bill is contained.
o Current funding strategy: The lower budget deficit for F21/22 has allowed National Treasury to reduce gross bond issuance from R518bn to R380bn and the net increase in T-bills by R9bn. The quantum of weekly bond auctions has been reduced by R2.6bn to R6.0bn from April. However, whereas we were hoping that this could lead to a flatter yield curve, the repricing of rate expectations around the world on the back of higher US growth and concern of an acceleration in inflation, has seen a steepening of the SAGB yield curve as non-residents exited EM debt, including SAGBs. Possible SA specific factors that could have contributed to the steepening of the SAGB yield and a few poorly supported SAGB and nominal ILB auctions, include the inability of National Treasury to continue to issue shorter duration SAGBs on account of a high redemption profile over the next five years. The implication is that more mid-long and long-dated bonds could be issued in F21/22 compared to F20/21. However, in view of the rising debt servicing bill associated with higher funding costs, which are well above the expected increase in the nominal GDP growth rate, it is imperative for government to continue to reduce the quantum of bond issuance further to contain the increase in debt servicing costs.
o However, there are various unresolved issues that could affect the increase in expenditure. These include the public sector wage increase for F21/22 to F23/24 – with public sector’s opening bid at CPI inflation + 4% - and financial support to SOE’s.