Highlights and analysis from the MTBPS

In his Mid-Term Budget Policy Statement, Finance Minister Enoch Godongwana emphasised that the mounting debt-service costs are a clear signal that the country must stabilise its public finance to redirect spending in favour of economic development. As such, there was no serious deviation from the country’s fiscal consolidation path. The Minister stated that “we have to rein in that kind of expenditure. It’s not sustainable.” An annexure to the MTBPS states that debt service costs that stood at R57 billion in the 2009/10 financial year increased to R365.8 billion in the 2024/25 financial year “crowding out expenditure on essential services such as health, social development and peace and security”.

Towing his predecessor’s line, he spoke of the need for economic growth but remained vague on plans to achieve this. Although the Minister’s tax plans will only be announced in February, tax revenues were better than projected in February with R120.3 billion more revenue from a mining commodities windfall and improved collections. Further, the gross domestic product (GDP) growth is forecast at 5.1% for 2021, settling at 1.8% in 2022 and 1.6% in 2023. The 2021 Budget deficit stands at 7.8%. Gross debt is 69.9% of GDP in 2021, or R4.31-trillion, growing to 77.8% of GDP in 2022.

Public sector wages remains a risk, specifically the recent public service wage agreement that breached the budget ceiling for compensation of employees by R20.5 billion. The fact that the Minister alluded to the possibility of shifting money from the Infrastructure Fund to cover the cost of honouring the public service wage agreement, is concerning.

Godongwana also highlighted the worsening of the financial positions of several state-owned companies as well as insufficient funds for the National Health Insurance (NHI). For the Energy sector specifically, the Minister acknowledged that government has spent more than a decade on fixing Eskom’s problems rather than creating additional electricity generation capacity. Godongwana mentioned the progress made by amending schedule 2 of the Electricity Regulation Act in particular, raising the threshold for private sector providers and making it possible for private power generators to sell directly to customers, which should alleviate the risk of load shedding. 

Government is also trying to reduce the country’s reliance on Eskom by diversifying primary energy resources. The outcome of the most recent round of the Renewable Energy Independent Power Producer (REIPP) programme demonstrates the positive gains from diversification. There are 25 projects that are part of the last round of Bid Window 5. These projects will generate more than 2 500 MW of power at a weighted average price of 47.3 cents per kilowatt hour. “This is the cheapest rate achieved in the history of the South African renewable energy programme and is among the lowest rates achieved globally.” 

Creating a competitive energy market is critical to support GDP growth as it will allow more beneficiation of South Africa’s mineral wealth. South Africa has committed to reduce GHG emissions and government announced in November that developed countries will mobilise the R131 billion in concessional and grant funding over the next three to five years to support South Africa’s transition away from coal and develop new sectors such as electric vehicles and green hydrogen. Eskom’s Just Energy Transition plan is also a notable part of the effort to de-carbonise the energy sector. The plan is currently being reviewed by government. A well-designed transition will enable South Africa to access additional international climate finance from entities such as the BRICS New Development Bank, the Green Climate Fund, Climate Investment Funds and other sources.

When it comes to Infrastructure, the MTBPS underscored the fact infrastructure spend will require participation from the private sector. The tightening of the fiscal purse strings means that although the public sector spent R3 trillion on infrastructure between 1998/99 and 2017/18, the private sector will have to come to the table for infrastructure spending. This is in line with government’s review in May of this year of the of the public-private partnership regulations. Government recommended eliminating delays in approval and implementation, standardising project preparation, building capacity at all levels of government, and simplifying regulations. The plan is set to be implemented in 2022.

A welcomed initiative is National Treasury’s invitation to participate in pre-budget consultation. Treasury announced in September that it is inviting members of the public to participate in pre-budget consultations. This is related to South Africa’s participation as one of the five pilot countries in the Fiscal Openness Accelerator (FOA) project launched in 2019 by the International Budget Partnership (IBP) and the Global Initiative for Fiscal Transparency (GIFT). The project’s overall objective is “to build the technical capacity of selected governments, enhance fiscal transparency and to support the implementation of a public participation pilot in the national budget cycle”.

MTBPS also allowed for the opportunity to review the Scope Budget 2021 – confirming government’s “fiscal strategy of returning the public finances to a sustainable position through ongoing restraint in expenditure growth and implementation of structural reforms to support economic growth.”