“The key economic and fiscal targets in the budget must be achieved and growth policies implemented if South Africa still wants to avert a financial Dunkirk later.”
Prof Raymond Parsons from the Business School at the North-West University says in the challenging economic circumstances, Finance Minister Tito Mboweni had a difficult balance to achieve.
“The Budget Speech had elements of both hope and despair. The slightly better economic and fiscal news, together with the vaccine roll-out in the months ahead, were welcome. The National Treasury's short-term funding arrangements were positive.”
Prof Parsons says the improved immediate economic outlook is what South Africa must now urgently build on to move its economy and public finances into more sustainable territory in the period ahead.
“Bearing in mind that the economy was already in a recession when the pandemic hit South Africa nearly a year ago, there is much economic ground to recover. While – as the Budget rightly emphasised – there will be an economic rebound this year, the drivers of South Africa's growth prospects beyond 2021 are much more important.”
Prof Parsons says the economy is not yet out of the woods until total fixed capital formation, underpinned by investor confidence, starts to accelerate from its current weak levels. “Much of the expected economic rebound is predicated off a very low base. Unemployment is now at record levels. Stronger immediate domestic economic trends therefore now need to be translated into sustainable job-rich investment and growth over the medium term.”
He says it was widely agreed last year already that South Africa had to plan and act beyond the pandemic, including grappling with the ongoing structural deficiencies in energy security, costly skills shortages and persistent policy uncertainties.
“The modest Budget growth forecasts beyond 2021 therefore need to be bolstered by the extent to which growth plans and other structural reforms are seen to be actively implemented to put the economy on a higher growth path.”
According to Prof Parsons strict but realistic timelines for policies and projects therefore need to be constantly and visibly enforced to achieve more tangible outcomes. He says the latest Budget continues to emphasise the serious long-term risks that remain in the fiscal outlook.
“Finance Minister Mboweni reiterated in his Budget Speech that South Africa's public finances remained “dangerously over-stretched”. He emphasised that South Africa still had to “shore up its fiscal position”. Hence, although the National Treasury has generally acquitted itself well over the past year in balancing the needs of the country in unprecedented conditions, there are no grounds for complacency. Unless – at a minimum – the growth and fiscal targets outlined in the 2021/22 Budget are successfully reached, South Africa may yet still face its financial Dunkirk later.”
Prof Parsons says the challenge remains to steadily and consistently implement policies and projects that will get South Africa out of its low growth trap without falling into a debt trap.
“Higher growth in itself will not solve all South Africa's economic problems. It would rather create a more buoyant climate for managing them.”
According to Prof Parsons the National Treasury and the country must therefore continue to implement an agenda of tough decisions and trade-offs that will avert a worst-case scenario debt outcome later.
“Achieving lower state spending without damaging economic growth still requires the size of the public sector wage bill to be effectively addressed and public sector productivity to be enhanced.”
He says bailouts to large state-owned enterprises need curtailment. “Although general taxes have understandably not been raised in a weak economy, it emphasises again the extent to which future tax revenues will depend on renewed growth. The latest tax shortfall is the highest on record.”
Prof Parsons emphasises that in the period ahead, the credibility factor in economic and fiscal policy still assumes great importance because of the previous poor track record of often not meeting relevant targets.
“Confidence now depends on visible traction emerging in structural economic reforms. Some near-term significant wins would help to build confidence. While the government has indeed announced some useful reform measures, not only should these be better communicated, but they should not be neutralised by other steps that are inconsistent with the intended overall economic direction.”
Prof Parsons concludes that the need to stay on message for the long haul is therefore essential. “This again emphasises that the required coherence and implementation of policy and projects are a collective Cabinet responsibility, in collaboration with the private sector where appropriate. Ensuring policy coherence cannot rest on the shoulders of the National Treasury alone if South Africa is to successfully turn its economy around sooner rather than later.”
