Mid-term budget forecast: Economist expects more spending, no tax hike

Fiscal prudence may shift towards more social spending in South Africa, an expert predicts ahead of the medium-term budget policy statement (MTBPS) on Thursday.

Despite the austerity measures announced in the previous MTBPS, which aimed to cut as much government spending as possible, Finance Minister Enoch Godongwana has seen mounting pressure to alleviate extreme poverty. 

Economist Peter Baur expects more spending on social benefits – given the extreme levels of poverty and the impact of Covid-19 on unemployment – with more prudent fiscal monitoring. 

His prediction coincides with calls from unions for government to prioritise the poor with more taxpayers’ money to be put into bulking up social grants, Covid-19 relief for the destitute, as well as small businesses ravaged by the economic effects of the pandemic. 

The South African Federation of Trade Unions (Saftu) has warned that South Africa cannot afford to continue with the spending trajectory set in the last budget because larger economies have demonstrated that heavy spending is needed to revive economies from the pandemic.

“You cannot cut public expenditure and reduce levels of investment and then hope that will lead to growth. South Africa needs a real stimulus package of R1 trillion to kickstart the economy,” says Saftu in its submission for the MTBPS. 

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Saftu points out that the US government instituted four fiscal stimulus packages, two by Donald Trump worth $3.6 trillion and two by Joe Biden worth $5.5 trillion, to respond to Covid-19 in 2020-21. 

The $9.1 trillion over two years, that both presidents from very different political policies believed necessary, represents more than 20% of the US’s GDP. 

South Africa is accused of doing the opposite by spending only R100 million in the 2020 fiscal stimulus instead of the R500 billion government promised to spend. South Africa’s stimulus in 2021 only amounts to 1% of the R5.6 trillion GDP. 

Although government’s austerity measures have largely aimed at cutting government’s salary bill by a third in the medium term, Baur predicts the expected heightened government spending may concentrate more on alleviating poverty and the general slump in economic activity. For this reason, South Africans should not expect tax hikes at this stage. 

“Household incomes are tight, and even small adjustments to income (such as a tax) will shift the income distribution within households quite considerably,” says Baur. 

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Anticipated key focus areas will include the high levels of unemployment, low levels of economic growth, low business confidence and Covid-19. To add another curveball into the country’s money troubles, a global commodities crisis is underway with escalating energy prices wreacking havoc on global and local markets. 

According to the Organisation for Economic Co-operation and Development (OECD), the economy is projected to rebound by 3.8% in 2021 and 2.5% in 2022.

But a Bloomberg survey indicated a looming debt crisis that Godongwana is likely to have to take heed of. Debt levels are expected to continue rising, peaking at 79.2% of GDP in the 2027 fiscal year, according to the median of seven economists’ estimates in the Bloomberg survey. 

“To address the key areas, we need to consider an expansionary fiscal policy, more spending than taxing, but with the government having limited access to available funds,” says Baur.

“Alternatively, we should not consider increasing tax on the income earners, and possibly free up tax on business for possible re-investment, but still continue to transfer resources to the poor.”

Also calling for more spending is schools lobby group Equal Education. 

The group has criticised government for spending less on education every year while continuing to refer to it as a key budget priority. 

“Last year, R2.1 billion was cut from the DBE’s budget which led to school infrastructure projects being delayed or totally cancelled, and schools having to take money from their already overstretched budgets in order to cover Covid-19 costs,” says Equal Education Parliamentary Officer Jane Borman.

Saftu has called on government to change its monetary policy to include the scrapping of the inflation targeting policy of 3-6% and reduce interest rates decisively.

“We decisively call for a 3% fall – while implementing the ANC’s most recent national conference resolutions to nationalise the Reserve Bank and change its mandate so that it focuses on growth, jobs, poverty and fighting inequalities,” the trade union federation said.

This, it argues, will lead to cheaper borrowing and bolster the household and SMMEs expenditure.

Simnikiweh@citizen.co.za 

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