Sun, 26 Jun 2022
22.7 C
Durban

Budget presents tough trade-offs for govt

Home Business Management Finance & Investment Budget presents tough trade-offs for govt

On 23 February, Finance Minister Enoch Godongwana, will table the 2022 National Budget in parliament. Analysts from FNB Economics preview the eagerly awaited event.

THIS Budget comes when the severe real-time impact of the pandemic on economic activity has largely diminished, but poverty and unemployment have deepened. The economy has been recovering, albeit unevenly across sectors.

We expect aggregate real GDP to revert to pre-pandemic levels from 3Q22, led by household consumption expenditure (HCE). The recovery in HCE has benefited from accommodative monetary policy, a swift recovery in labour income across various income groups, and government’s Social Relief of Distress (SRD) grant, which President Cyril Ramaphosa has announced will be extended to 1Q23.

At the 2021 Medium-Term Budget Policy Statement (MTBPS), Treasury projected an economic growth rebound from -6.4% in 2020 to 5.1% in 2021, followed by moderation to 1.8%, 1.6% and 1.7% for 2022, 2023 and 2024, respectively. We expect Treasury to trim its economic growth forecast for 2021 to align with our 4.7% due to the worse than expected impact of the July economic unrest.

We do not, however, expect the 2022 Budget to make material adjustments to the outer period forecasts, which reflect structural weaknesses – and are hardly sufficient to arrest the rising unemployment trend throughout the forecast horizon.

Our forecast is for economic growth of 2.2%, 1.7% and 1.7% in 2022, 2023 and 2024, respectively. We believe that long-term economic growth could be higher if economic reforms and infrastructure investment are accelerated.

Encouragingly, in his State of the Nation Address (SoNA), President Ramaphosa accentuated that government is accelerating critical structural reforms – positive for medium-term economic and employment growth.

At this stage, we are concerned about the protracted recovery in fixed investment (gross fixed capital formation), which is expected to remain around 14.4% of GDP over the next few years, a lower proportion than the 16.0% in 2019 and the National Development Plan’s goal of 30% by 2030.

Public infrastructure investment (i.e., energy, water, roads and telecommunications) will thus be critical to providing a favourable environment for attracting private sector fixed investment.

Therefore, the government faces the tough trade-off between providing permanent social support to unemployed adults and risking a deviation from fiscal consolidation or crowding out private investment, which would be better suited to create sustainable employment.

Most Popular

The rollercoaster and exhilaration of being a demolition specialist

TODAY is International Women in Engineering Day. To celebrate, Jet Demolition contracts and project manager Kate Bester highlights what it's like being in close...

Financial reports won’t save local government crisis, warns town and regional planners

By Burgert Gildenhuys: Director, BC Gildenhuys & Associates IT is unclear whether South Africa has the will or guts to confront issues contributing to the...

N3 truck blockade: It’s ‘economic sabotage’, say ministers and business

ANOTHER truck blockade saw Van Reenen's Pass on the N3, the country's main domestic trade route, being closed on Thursday 16 June. This protest...

Factory of the Year competition returns as economy bounces back

FOLLOWING a challenging two years in the manufacturing sector, Kearney, a leading management consulting firm, is excited to announce the return of the Factory...