“The foundations of the 2023 Medium-Term Budget Policy Statement (MTBPS) on 1 November need to be realistic and sound, given the additional fiscal and economic challenges it faces.”

Prof Raymond Parsons, economist at the North-West University (NWU) Business School, says the National Treasury has already warned of the tough decisions that will need to be made in the medium-term Budget.

He says a shortfall of about R100 billion is now widely forecast. “Unless remedial steps are taken, the risks of another fiscal cliff for South Africa will arise. The latest Monetary Policy Review also emphasised that a lack of fiscal sustainability would keep interest rates elevated for longer.”

According to Prof Parsons, it is now generally recognised that the combination of low growth, less-than-expected tax revenues and continued high government spending means that the economic and financial assumptions on which the 2023 Budget projections in February were based are no longer valid.

“Several of the fiscal risks outlined in the main Budget have materialised. These factors have now severely reduced available fiscal space, necessitating a realistic approach to a less favourable set of circumstances. If the medium-term budget is not credible in its actions, it will be assumed that there will just be more borrowing or big tax increases to come later.”

Prof Parsons says government bailouts to struggling state-owned enterprises remain a persistent problem. Transnet recently asked the government for financial support – which is basically a bailout – to implement its turnaround plan. The Bureau for Economic Research has warned that Transnet’s request comes at an inopportune time for the fiscus. How the National Treasury decides to respond to Transnet’s need for further assistance will be seen in the MTBPS.

“South Africa is already at the outer boundary of what it can reasonably do to contain its debt burden and stabilise its public finances. Reducing the deficit inevitably now means recalibrating the broad dynamics of its public finances. With the debt-to-gross domestic product (GDP) ratio now over 70% and expected to increase further, South Africa's rising debt bill is already absorbing too large a share of the Budget at the expense of other major social spending and infrastructure.”

Prof Parsons emphasises that a long-range fiscal plan is therefore now needed to steadily wind down spending and debt and bring them under control in a way that establishes clear priorities for the future. Fiscal policy will inevitably have to be pragmatic and realistic to deliver sensible trade-offs in order to project a credible medium-term Budget that offers more predictability and certainty.

“This fiscal balancing act will therefore require a skilful but level-headed revised Budget mix and projections. It requires successfully managing multiple spending pressures at a time when political elections are pending in 2024. The forthcoming medium-term Budget must be a credible fiscal plan that does enough in challenging economic circumstances to placate nervous markets and not allow excessive borrowing to crowd out the private sector.”

According to Prof Parsons, it is apparent that, whatever other steps may be needed to balance the books, all roads eventually run through inclusive growth if South Africa wants fiscal sustainability in the longer term. And if, through job-rich growth, South Africa can also move more citizens out of welfare and into work, a lowering of the quantum and risks of welfare dependency will also improve the fiscal balance.

“The number of countries that have grown successfully out of large debt is really quite small, whereas the number of economies that got into major fiscal difficulties that ultimately ended in inflation and other economic distortions is quite large. This emphasises why there can be no complacency about the immediate medium-term Budget challenges and no doubt about the National Treasury's determination to keep the fiscal situation manageable.”

Prof Parsons concludes that the 2023 MTBPS must therefore reinforce the overall message that the trajectory of South Africa’s GDP growth (and potential growth) will eventually be driven mainly by the pace at which structural reforms materialise, especially on the energy front. The medium-term Budget needs to reflect a renewed commitment to do what is necessary to help reduce South Africa's risk premium by strengthening the pillars of fiscal sustainability.