The National Treasury has put the brakes on the onerous debt consolidation plans it outlined in June, reducing its planned expenditure cuts by R83bn to R307bn over the next three years with public servants set to bear the brunt of the fiscal squeeze.

In June, budget cuts of R390bn were envisaged, which analysts said were unachievable and would entail unacceptable cuts to essential government services.

The government will be relying on a wage freeze as the main pillar to achieve its debt consolidation target, which the Treasury says is crucial if SA is to avoid a debt crisis. It outlined its plans in the medium-term budget policy statement (MTBPS) tabled in parliament on Wednesday by finance minister Tito Mboweni.

The government is looking at reducing its wage bill by R310.6bn over four years, including the R36.5bn cut for 2020, with major cuts planned for labour-intensive sectors such as learning and culture (R114bn over four years), and police and security (R78.5bn).

It has proposed a 1.8% growth in the public sector wage bill for 2020 and average annual growth of 0.8% between 2021/2022 and 2023/2024. This is a far more radical reduction in the wage bill than the R160bn cut over the next three years, which the government signaled in the 2020 budget.

However, its plan is set to be fiercely resisted by unions, which are contesting the government’s bid to renege on its 2018 wage agreement and are sure to oppose the wage freeze the Treasury envisages. The Treasury acknowledges that the outcome of the legal contest over the 2018 wage agreement poses a significant risk for its expenditure reduction plans.

The R306.7bn spending cut over three years will also see government departments cutting non-essential programmes in what Mboweni says will be “wide and deep” expenditure reductions.

Expenditure will be slashed by R62.9bn in 2021/2022, by R92.9bn in 2022/2023, and by R150.9bn in 2023/2024, and will grow below inflation by 1.6%.

Treasury officials said that more detail on where the spending cuts will be made will become clear in the February 2021 budget. However, infrastructure and capital spending is protected with payments for capital assets growing on a nominal basis by an average of 7.8% between 2020/2021 and 2023/2024.

Provincial equitable share allocations will be reduced by R209.7bn between 2021/2022 and 2023/2024 relative to the 2020 budget, mainly because of the cuts to the compensation budget and conditional grants of R12bn. Transfers to local government will be reduced by R17.7bn.​

Departmental budget cuts — R1bn from higher education and training and R1.2bn from the police — contributed to the R10.5bn allocated in the MTBPS for the implementation of SAA’s business rescue plan.

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Debt to GDP

The easing of the Treasury’s fiscal consolidation plans is evident in the MTBPS, which forecasts that debt to GDP will increase to a greater extent in the outer years than envisaged in the June supplementary budget. The plan will also be spread over five years instead of three.

This fiscal year’s gross loan debt to GDP figure of 81.1% remains the same as the June figure, and is increased over the next three years to reach 92.9% in 2023/2024 (compared with the 87.4% projected in June), and 95.3% in 2025/2026. In 2023/2024, gross loan debt is expected to amount to R5.54-trillion.

The achievement of a primary surplus — budget revenue less expenditure excluding debt service costs — has also been pushed out to 2025/2026 instead of the 2023/2024 anticipated in June.

Debt service costs, now at 4.8% of GDP, are projected to increase at an average annual growth rate of 16.1% over the next three years reaching R353bn in 2023/2024.

With the economic impact of Covid-19 having been more significant than originally expected, the MTBPS has raised the economic decline this year from the 7.2% penciled in in the June supplementary budget to 7.8% and has projected a higher growth of 3.3% (2.6% in June) for 2021, 1.7% (1.5%) for 2022, and 1.5% (1.5%) for 2023. Treasury’s growth forecast for this year is well below the 8%-8.5% decline forecast by some economists.

This lower growth will see the shortfall in tax revenue worsen from the R304bn projected in June to R312.8bn though the main budget deficit is expected to remain the same at 14.6% for 2020/2021, widening to 10.1% in 2021/2022 from the June figure of 9.3%, 8.6% (7.7%) in 2022/2023 and 7.3% for 2023/2024.

Tax increases of R40bn over four years are planned to boost revenue, increasing by R5bn in 2021/2022, R10bn in 2022/2023, R10bn in 2023/2024 and R15bn in 2024/2025.

The government’s gross borrowing requirement will amount to R774.7bn this year, R602.9bn in 2021/2022 and to R637.2bn and R593.2bn in the subsequent two years.

The MTBPS has provided for a contingency reserve of R5bn each year over the next three years.

At the same time that it cuts expenditure, the government will also try to foster economic growth through more investment in infrastructure and implementing the economic reconstruction and recovery plan outlined recently by President Cyril Ramaphosa.

“The fiscal measures outlined in the MTBPS will bring the state’s debt burden under control, realign the composition of spending from consumption towards investment, and improve investment conditions by lowering the cost of capital,” the statement said.

“The fiscal outlook is highly uncertain. Major risks include the speed of the recovery, the legal process associated with public service compensation, and the forthcoming wage negotiations. In the broader public sector, several state-owned [entities] and municipalities have insufficient funds to cover operational expenses.”

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