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With corporate income tax, VAT and personal income tax all running ahead of expectations in the October Mid-Term Budget Policy Statement (MTBPS) and expenditure running in line, a surprise windfall of R100bn will provide the Minister of Finance, Tito Mboweni, with some welcomed fiscal room to manoeuvre in this year’s budget review.
The Minister tables the February 2021 Budget Review on Wednesday, 24 February. In contrast to the June 2020 Supplementary Budget and October 2021 MTBPS (both of which emphasised the risk of an unsustainable rise in the debt trajectory against a background of weak growth, a high wage bill and low revenue receipts), the revenue outcome appears to be significantly better.
In the October 2020 MTBPS, the government said they expected that revenue would be down R300 billion in comparison to what they’d forecast in the February 2020 budget. The situation we now find ourselves in is that revenues will be around R100 billion better than expected. But this does not mean government can go on a spending spree – we are still R200 billion down on revenue from last February.
The windfall in revenue receipts and prefunding provide the Minister of Finance with a rare opportunity to make a meaningful dent in the rising debt trajectory.
The increase in cash balances could facilitate a reduction in bond issuance in the new fiscal year, which would moderate the increase in debt servicing costs.
Our Medium-Term Expenditure Framework (MTEF) forecast suggests that this could narrow the primary budget deficit to 1.1% of GDP in 2023/24, which is marginally better than the MTBPS forecast of 1.3% of GDP.
The gross debt to GDP trajectory has the potential of being revised lower to ~91.0% of GDP by 2023/24 vs the MTBPS forecast of 92.9%. This positive trajectory effect is important if National Treasury’s credibility is to be restored and further sovereign downgrades are to be avoided.
The key issues we will be watching:
- The size of the revenue overrun in 2020/21.
- The increase and composition of spending in 2021/22 in the context of political dynamics.
- Bond supply in 2021/22 and the MTEF period.
- The strategy on SOE standardisation and further bailouts, in view of outcomes exceeding forecasts.
- The primary balance deficit and gross debt-to-GDP trajectory over the MTEF period.
Revenue receipt surprise
The key surprise in the current fiscal is a significant overrun in revenue receipts relative to the June 2020 Supplementary Budget and the October 2020 MTBPS shortfall of R300.1bn. Revenue receipts include proceeds from taxes and other duties levied by government; interest on its investments; and the fees and charges it receives for its services.
Median expectations are looking for an overrun in revenue receipts of R100bn. Investec for Corporates & Institutions (ICIB) has pencilled in R85bn. This outcome results in revenue receipts coming in ~-12.4% below the level in 2019/20 and the MTBPS forecast of -18.3%.
The potential of an improved revenue performance became evident late in 2020 when the fiscal response package (that included income support of R70bn, consisting of tax deferrals, skills development levy (SDL) holiday and employee tax incentive (ETI) extensions and other tax relief measures of R26bn) ended.
Notwithstanding the deep contraction in economic growth, estimated at 7.3% in 2021, tax buoyancy remained strong. This could see the revenue undershoot amounting to ~R200bn as opposed to the forecast of R300bn. We forecast corporate income tax to be R30bn ahead of target, personal income tax +R25bn and VAT +R30bn.
The reasons for the high tax buoyancy can be ascribed to the following:
External factors such as a surge in commodity prices, which raised the tax contribution of mining companies to the fiscus by R30bn to R40bn.
Domestic VAT that received a boost from durable good sales with volumes returning to pre-Covid levels in Q4 20 and the effect of the weaker rand on imports.
The effects of the rise in unemployment and decline in bonuses have affected PAYE less negatively than expected; tax payments on retrenchment packages have provided a further offset.
Most of the other tax components have also performed better than the MTBPS forecast, which suggests that the forecast was conservative on account of the high level of uncertainty and volatility risk associated with the supply- and demand-supply shock to the economy.
What’s expected in the next fiscal
Tax buoyancy is expected to return to the long-term average of around 1 in the next fiscal year. The boost from the mining industry is unlikely to be repeated unless production volumes increase. Commodity prices are expected to remain high but not to increase materially beyond Q2 21.
Additionally, the scarring from the Covid-19 lockdowns on the tax base will become clearer in 2021. A recovery in employment is likely to lag the rebound in economic activity with a continued divergence in the performance across industries, as the Covid-19 vaccine rollout remains unclear.
More retrenchments and business closures in the services industry such as public sector transport, have been announced in the new year.
Tax increase in 2021/22?
It would be prudent for government to refrain from raising taxes by the amount of R5.0bn that was tabled in the forecast for 2021/22. With regards to the Covid-19 vaccine, there have been suggestions of a solidarity tax to finance the cost. ICIB is of the view that the windfall from mining taxes can be redirected to cover the additional expenditure at a time when consumer confidence remains fragile.
Expenditure in line with target
The extension of the distress grant from October 2020 to March 2020 at a cost of ~R12.0bn is expected to be countered by underspending and the contingency reserve of R5.0bn. Current payments at the end of December 2020 comprised 65.6% of the target (compared to 67.2% in the previous FY) with capital investment also lagging the budget, constituting a mere 43.3% of the target (previously 56.5%).
Vaccine rollout cost, SOEs and the public sector wage bill
We expect additional spending of R25bn over and above the 2022/23 target of R1 805.8bn. This includes the cost of the Covid-19 vaccine of R12.5bn (we have assumed that approximately half of the cost will be carried by medical aid companies in the private sector); a further bailout of R7.5bn to the Land Bank and R0.5bn to Denel.
We think that the expenditure forecast will again be shrouded with a high level of uncertainty which is related to the public sector wage bill and further SOE bailouts. Both these issues, which are highly politically motivated, were referred to in the letter of intent to the IMF when the Covid-19 loan of $4.3bn was signed off.
The October 2020 MTBPS stated an increase of 0.8% in the wage bill over the MTEF period, which covers the next three years of the multi-year wage agreement, with negotiations in progress. The first year (which is 2021/22) has factored in a wage freeze, followed by increases of 1.2% and 1.3% in the outer years.
Transfers to SOE’s, where upside forecast risk has persistently materialised in the past, remains a major concern. In 2020/21, the additional transfer of R10.5bn to SAA was countered by a reduction in transfers to local authorities and other departments in order to be budget neutral.
Main budget deficit and funding
The revenue overrun in 2020/21 should go some way to reduce the size of the main budget deficit. We expect the MTBPS forecast of 14.6% of GDP to come in at 12.9% and 2021/22 to shrink from 10.1% to 9.7%.
The lower main budget deficit and prefunding arising from strong demand from non-competitive bond auctions could see an increase in the closing cash balance of ~R120.0bn. This in turn could lower the net amount of Treasury bills (T-bills) raised and the size of the weekly bond auctions.
We think there will be a net increase in T-bill issuance of R60.0bn compared to the MTBPS forecast of R67.0bn. The size of the weekly bond auctions could also be lowered by R1.0bn from R8.6bn to R7.6bn; a larger reduction is possible if there is a larger drawdown on cash balances and/or a larger increase in net T-bill issuance.
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