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As domestic financial markets are likely to be dragged down by the US elections in early November, events specific to South Africa are back in focus this week, and the release of the Medium-Term Budget Policy Statement ( MTBPS) master the procedures.
The market will look to MTBPS to provide a more in-depth forecast of South Africa’s post-Covid-19 fiscal trajectory, including the spending and funding requirements of the government’s recently announced economic recovery plan.
The Bureau of Economic Research (BER) said special attention will be paid to the extent to which the Treasury sticks to the “active” scenario outlined in June.
“(The June plan) stabilizes government debt at around 87% of GDP by 2023/24; (this) will be scrutinized to determine the potential for implementation, and therefore credibility,” he said.
The BER said that more details on medium-term spending and tax measures to achieve the active scenario will be welcome. In terms of the much talked about fiscal plans, although the fiscal announcements will likely be left to the main budget in February 2021, the MTBPS may provide some clues, he said.
“It will be crucial if the Treasury sticks to the aggressive spending cuts from 2021/22 onward that were outlined in the June supplemental budget.
“After the June budget statement, there was a lot of skepticism as to whether, relative to the 2019 MTBPS baseline, cuts in excess of R350 billion between 2020/21 and 2022/23 were feasible, or even desirable.” .
The BER said it shares these doubts, citing President Cyril Ramaphosa’s economic advisory council, which proposes a more gradual approach to spending cuts to give the economy breathing space to recover from the Covid-19 collapse.
By comparison, based on recent academic studies, senior Treasury officials have argued that in recent times, the fiscal multiplier (the change in GDP in response to a change in public spending) has in fact been quite low in South Africa.
“Therefore, large spending cuts may not have too adverse an impact on GDP. The adverse impact on GDP could also be reduced if the composition of spending can be improved with a greater focus on capital rather than expenditures on current spending.
“In this context, we believe that the Treasury is likely to remain firm in proposing an aggressive spending restriction (with a better composition) from 2021/22 onwards.”
However, SAA-related additional spending demands and financing of Ramaphosa’s economic recovery plan, as well as a weaker real GDP outlook for 2020 than the Treasury assumed in June, suggest that the starting point for the budget deficit may be even weaker than previously expectedsaid the BER.
Taking this into account, the group expects significant major budget deficits of 14.9, 10.8 and 9.3% for 2020/21 through 2022/23.
This results in the debt-to-GDP ratio rising to over 88% in 2022/23, a weaker outlook than the active Treasury scenario in June.
Read: Wealth Tax Among Mboweni’s Budget Options
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