Finance Minister Enoch Godongwana on Thursday said National Treasury expected South Africa’s economy to grow by 5.1% this year, from a 6.4% contraction in 2020.
Tabling his maiden Medium-Term Budget Policy Statement (MTBPS) in the National Assembly, Godongwana said in the first half of 2021, the local economy had recovered more quickly than expected.
He said this reflected the less stringent Covid-19 lockdown restrictions, along with lower interest rates, support from strong international demand, and the windfall from higher commodity prices.
“Over the next three years, the growth of the local economy is expected to average 1.7%, reflecting some structural weaknesses such as inadequate electricity supply,” Godongwana said.
The minister said based on this, South Africa’s economic recovery would depend on the adequate electricity supply and greater uptake in the rollout of vaccines to enable more sectors of the economy to open.
“The speed and scale of vaccination, therefore, is of the essence – there should be no room for hesitancy,” he said.
Godongwana said he was tabling the MTBPS under unprecedented conditions due to the Covid-19 pandemic, which he described as “a crisis like no other”. He said the pandemic had caused severe disruptions to economies the world over and not only in South Africa.
“In addition to the high cost to human life, the crisis is likely to leave deep and long-lasting scars on the global economy.
“The scarring impact of the crisis is evident in increased debt levels, income vulnerabilities; while unemployment, poverty and inequality are deepening,” he said.
R4 trillion in debt
Godongwana warned that South Africa’s R4 trillion debt was incurring debt service costs that would become
the largest portion of government spending, compared to individual functions, from 2022.
He said debt-service costs were expected to rise from R269.2 billion in 2021-2022 to R365.8 billion in 2024-2025, which is higher than the health and police services budgets.
“These debt service costs are non-discretionary – in other words, we cannot avoid paying them,” Godongwana said. “Their effect, therefore, is to crowd out other spending priorities.”
Despite this, Godongwana underscored some positive developments on the fiscal side. He said tax collections had exceeded expectations in the short-term, largely due to the commodities boom in the mining sector.
Revenue for 2021/22 was now estimated to reach R1.5 trillion, compared to R1.4 trillion at the time of the 2021 budget in February.
This is an upward revision of R120.3 billion, Godongwana said.
“The consolidated budget deficit is expected to be 7.8% of GDP in 2021-2022, gradually lowering to 4.9% in 2024-2025,” he said.
Godongwana warned that the commodities boom would not last forever, saying precious metal prices had started to soften.
“This means the revenue gains from the commodity price rally are expected to be temporary. Therefore, we should be careful about our spending commitments.
“We should not make permanent spending commitments from short-term revenue benefits. This approach is embedded in our fiscal framework. We are of the view that revenue can be increased with a more effective and efficient revenue collection authority,” he said.