Key assumptions and background to Medium-Term Budget

Assumptions –  

SA Treasury has worked its Budgeted figures on the assumption that the commodity price boom will be temporary, with SA’s primary export earners platinum, coal and iron ore experiencing either pedestrian growth or significant declines. Offsetting this admirable conservatism is an optimistic view that SA’s key import, oil, will decline to below $70 a barrel by 2024.

Background –

  • Government spending has risen on average by 8.8% a year since 2008, with much of this going to public sector wages, now 35% of total expenditure. Much of this overspending has been funded by higher debt.
  • As a result, debt-servicing costs now consume 21c in every rand of tax paid by South Africans. Adding to the burden, over R400bn in debt matures in the next three years and will either need to be repaid or refinanced at a higher interest rate.
  • The interest rate paid on the debt is higher than the economic growth rate (see below) – so it is impossible to reduce the ratio of debt to GDP without generating a primary budget surplus.

  • SA’s social wage is R1.06trn, 59.5% of non-interest spending. together with a large increase in public debt has resulted in “an unsustainable position.”
  • Government will pay 21c of every tax rand on debt this year – more than on health, social development, peace and security. Stabilising debt is essential.
  • Since 2021, Budget SA has benefitted from surge in commodity prices. But revenue is still well below pre-pandemic levels.
  • Structural nature of the economy’s underperformance means higher economic output has not lifted investment and employment. Businesses are constrained by electricity shortages, inefficient and high-cost rail freight, inadequate broadband spectrum and red tape.
  • Government intends accelerating structural reforms while keeping fiscal consolidation on course to narrow the Budget deficit and stabilise debt.
  • But Covid-19 hit the country hard, amplifying the crises of poverty and unemployment. Government’s response included a special Covid-19 social relief of distress grant to 9.5m people bringing the total number of social grant recipients to 27.8m.
  • Joblessness cannot be solved by government spending – it requires strong and sustained economic growth – the average of 1.7% projected for the next three years is too low to meet the country’s developmental needs.
  • The recent public service wage agreement breached the budget ceiling for compensation to employees by R20.5bn.

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