Isaah Mhlanga, chief economist at Alexander Forbes.
- Large revenue overruns mean that the government’s budget deficit will be lower than expected.
- But next year promises to be difficult as government spending declines and weak growth is expected.
- Unemployment is expected to rise further if growth does not resume.
South Africa is expecting a good news budget next Wednesday due to the very large projected revenue overrun of between 160 billion and 180 billion rand, Alexander Forbes chief economist Isaah Mhlanga said on Tuesday.
The revenue overrun will result in a lower budget deficit than projected a year ago. It had also reduced two significant tax risks posed by the government’s overspending on civil servants’ payrolls and the extension of the R350 Social Relief of Distress grant, as the government had sufficient funds.
Excess income – driven by a boom in commodity prices, which account for a large share of South Africa’s exports – has also been positive for the debt consolidation path outlined in the medium-term fiscal policy statement. , did he declare.
But despite the improved image, Mhlanga warned that SA faced a challenging global environment, where growth was expected to slow and inflation to rise. The domestic environment would also be more challenging due to the combination of weak growth and rising interest rates as the SA Reserve Bank seeks to “normalize” monetary policy and rising inflation.
Government spending is also expected to moderate as spending cuts are made to bring debt under control.
“It will be a difficult environment for ordinary citizens,” Mhlanga said.
While short-term fiscal metrics have improved, long-term structural issues and South Africa’s low growth problem mean it will struggle to improve employment prospects without a dramatic change in the economy. investment environment.
South Africa will need an economic growth rate of more than 3% a year to change the unemployment rate, which is at an all-time high of 35%, Mhlanga said. But it is stuck in a weak growth trap of less than 2% in the medium term.
This means that the medium-term unemployment rate will continue to rise. According to the broad definition, which includes those who have given up actively looking for work, 46% of South Africans are unemployed.
If the country is to increase its rate of economic growth, it was essential that the micro-economic reforms that have been outlined in successive State of the Nation addresses, but barely implemented, be accelerated. In his state of the nation address last week, President Cyril Ramaphosa promised much faster reform, but Mhlanga stressed that the government’s implementation record was poor.
While this dynamic has led many to argue that a basic income allowance should be put in place to help the poor, Mhlanga warned that due to low economic growth, the economy was not producing enough. jobs and was not keeping pace with population growth.
“Some assure us that the reforms will take place and growth will resume, generating the revenue needed to fund a basic income grant. But the government’s implementation record is poor and the basic income grant will become a permanent drain. To put in place a permanent subsidy without guaranteed reforms and economic growth, South Africa will face a fiscal crisis in the next 10 years,” he said.
While the temporary R350 subsidy to the poor has been extended for another 12 months until the end of March 22, a decision on a permanent subsidy is not expected until next year’s budget.