Getting active – a new approach to avoid a fiscal reckoning
25 Jun 2020
With a fiscal reckoning looming, government has had to readjust its targets and adopt what Finance Minister Tito Mboweni calls an active approach to control spending. This will involve a full reassessment of the medium-term expenditure framework, of which more detail will emerge in October’s MTBPS.
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This active response involves revisiting the 2021 medium-term expenditure framework (MTEF), starting in July. This will consist of measures to stabilise the rising debt trajectory and narrow the budget deficit.
As such, the October 2020 Medium Term Budget Policy (MTBPS) will (again) come into sharp focus in the assessment of the government’s commitment to push through what are likely to be politically difficult decisions. These pertain to reforms to (and support for) state-owned enterprises (SOEs) and the public sector wage bill.
The starting point will be to implement zero-based budgeting for all departments, with the goal of reducing spending, combined with adjustments to revenues, a total saving of R250bn. Tax increases are limited to R5bn, R10bn and R15bn in each year over the MTEF.
Tertia Jacobs, Investec Treasury Economist
Six key points
Larger than expected shortfall in main revenue receipts: The expected shortfall in tax revenues was R304.1bn (including tax relief measures of R26bn), was well above our estimate of R259.0bn. In April and May alone, domestic value-added tax and pay-as-you-earn already lagged the target by about R35bn. Main tax revenues are expected to decline to 22.6% of GDP, compared to the initial forecast of 25.8%.
Return of spending discipline: Expenditure could rise to 37.2% of GDP, compared to the February forecast of 32.5%. The Covid-19 related support measures have been lowered from R190bn to R145bn, leading to a net increase in spending of R36bn. This was achieved by substantial reductions to baseline allocations of R100.9bn and other adjustments of R8.1bn. Spending was adjusted by removing funds that had been underspent due to delays caused by the lockdown; projects that could be delayed and rescheduled; or those with a poor performance history.
The Land Bank was the only SOE that received additional support, with a liquidity injection of R3.0bn. We expect to see more direction in the October MTBPS, following the appointment of a presidential SOE council on 11 June 2020.
Public sector wage bill: The implementation of a zero percent salary increase in F20/21 has shaved R37bn from the F20/21 public compensation bill, with the supplementary budget adding a further R0.7bn to base line.
Accelerating debt servicing costs: Interest payments will continue to accelerate and absorb a larger share of revenues, rising to an estimated 4.9% of GDP in F20/21 compared to the previous forecast of 4.2%. The focus of the funding strategy will be on containing the increase in interest payments through the issuance of Treasury bill and bonds with a maturities of between 7 to 10 years.
Main budget deficit to widen to 14.6% of GDP: The consolidated budget deficit is forecast to widen to 15.7% of GDP, from 6.8% of GDP due to rundown of R40bn in cash balances to provide wage support through the various UIF assistance programmes. The main budget deficit is expected to increase to 14.6% of GDP from 6.8%, and is above ICIB’s forecast of 13.6%.
But debt is our weakness. We have accumulated far too much debt; this downturn will add more. This year, out of every rand that we pay in tax, 21 cents goes to paying the interest on our past debts.
Tito Mboweni, Finance Minister
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Net Treasury bill issuance will increase by R98.0bn, to R146.0bn. We expect the size of the current weekly auctions to be unchanged as the funding pace is aimed at the new target.
The gross amount of bonds to be issued has been raised from R337.7bn to R462.5bn. This could see the size of the weekly nominal and inflation-linked bond auctions raised by approximately R1.3bn in the coming weeks. As noted above, the weighted average time-to-maturity of funding bonds will remain between seven and 10 years, compared to 15 years in the previous fiscal year. The average maturity of funding bonds in April and May was 9.4 years. Switch auctions will continue to reduce refinancing risk.
Debt trajectory under a passive or active strategy
This is important for stabilising the debt trajectory at around 86% of GDP by F22/23 (peaking at 87.% of GDP in F23/24). The acceleration in the net loan debt ratio from 58.4% in F19/20 to 83.9% can be ascribed to a drawn down in cash deposits of R150bn. The inability to curb spending and revive GDP growth paves the way for the debt to GPD ratio to reach 140.7% by F28/29.