Budget 2023
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Key risks facing South Africa’s fiscal consolidation

Pretoria – South Africa’s macroeconomic outlook, budget execution, policy uncertainty and financially distressed state-owned companies are among risks facing the country’s fiscal consolidation.

This is according to National Treasury’s Budget Review for 2017, which was released on Wednesday as part of Finance Minister Pravin Gordhan’s delivery of his Budget Speech.

As part of its Budget Review, Treasury said South Africa’s fiscal policy is focused on containing the budget deficit and slowing the pace of debt accumulation in a bid to maintain spending programmes and promote confidence in the economy.

It further forecast that its 2017 budget tax proposals will raise R28bn in additional revenue for 2017/18 while the main budget primary deficit will halve from 1% of GDP in 2015/16 to 0.5% of GDP by the end of 2016/17.

Meanwhile, net debt is forecast to stabilise at 48.2% of GDP in 2020/21.

But Treasury outlined how risks to fiscal policy could throw it a curve ball in years to come.

“Risks to the fiscal consolidation remain elevated,” said Treasury.

Low growth, recession risk

The first of these risks is the threat of low growth and even recession.

“The likelihood of a recession has receded somewhat, but lower economic growth remains a significant risk to the budget. In most of National Treasury’s economic scenarios, debt is projected to stabilise as a share of GDP,” said Treasury.

“However, persistently weak growth over the next decade would result in a rising debt-to-GDP ratio,” Treasury added.

Tax buoyancy

The next risk facing fiscal consolidation is tax buoyancy, which is the ratio of tax revenue growth to nominal GDP growth.

“Tax buoyancy fell from 1.47 in 2015/16 to 0.88 in 2016/17. This reflects a combination of lower tax revenue and higher nominal GDP (mainly resulting from falling imports),” said Treasury.

“Government projects a tax buoyancy of 1.1 in 2019/20,” Treasury added.

Spending pressures

Treasury further said that policy risks can also result from unanticipated spending pressures, especially where budgetary consequences have not been adequately considered.

“For example, the need to subsidise university fees by a higher-than-budgeted amount continues to put pressure on the public finances,” said Treasury.

Health of state-owned entities

The financial condition of state-owned companies and public entities represents another significant risk over the medium term, said Treasury.

“Several state-owned companies – including South African Airways (SAA) – require close monitoring and may require intervention to stabilise their operations,” said Treasury.

Treasury warned that any request for funding allocations will be considered in light of principles established in the 2014 Medium Term Budget Policy Statement (MTBPS), which outlined that approved funding should not negatively impact the budget balance.

“Moreover, state-owned companies facing financial difficulty must demonstrate tangible progress returning to profitability,” said Treasury.

“Government will also explore opportunities to expand private participation,” said Treasury.

Road Accident Fund solvency

Treasury said it’s also concerned about the long term solvency outlook for the Road Accident Fund (RAF).

It further said that legislation to create a new Road Accident Benefit Scheme is expected to be tabled in Parliament this year.

To manage all risks, government said it plans to manage the national and provincial wage bill, improve budget execution and stabilising the operations of financially troubled public entities.

* Visit our Budget Special for all the budget news and in-depth analysis.

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