The Medium Term Budget Policy Statement: How Credible Is It? - The Baseline Projection

What is the purpose of the Medium Term Expenditure Framework?

The Medium Term Expenditure Framework was first introduced in the 1999/2000 fiscal year. It precedes the introduction of the main Budget by at least three months. It has three main actual or potential purposes:

1. To provide public institutions with guidance on how to prepare their estimates for the following Budget. The guidelines are primarily intended for national government departments and public institutions and may contribute to the budgeting process in provinces[1]. This is the public service guidance function.
2. To provide a coherent framework within which the Executive can make policy choices informed by costs and tradeoffs. This is the rational government policy function.
3. Along with statements from the Reserve Bank’s Monetary Policy Committee, to anchor expectations about the evolution of macroeconomic conditions by providing a projection of fiscal policy over the MTEF period (the current and next three fiscal years). This is the expectations formation function.

Intelligent pursuit of these three functions leads to desirable outcomes which reinforce each other: first, the co-ordination of public administration, secondly a precise description of the bounds of the possible when it comes to government policy formation and thirdly, a clear context within which private sector actors can take optimizing decisions. Intelligent pursuit requires the following:

1. Being up to date. The MTBPS and the Budget are two occasions on which the MTEF can be updated, and supplementary budgets, if any, offer further opportunities. Each update should reflect circumstances and expectations at the time of publication, and they should indicate how these have changed from the previous Budget or MTBPS.
2. Professionalism, thoroughness and honesty. Estimates and projections should be made by competent professionals after careful consideration and at the required level of detail. Any manipulation of them would be fatal for credibility.
3. Avoidance of explicit and implicit incoherence, and of leaving loose ends. The MTEF is useful to the extent that it is coherent and that discussion of issues does not terminate in vague and incomplete loose ends. 
4. Careful attention to the identification and analysis of contingencies, especially in unsettled times. The extent of risk varies over time. It was particularly high at the time of the 2008 financial crisis and there are new risks associated with the COVID epidemic. The appropriate response to heightened levels of risk is increased attention to contingency analysis.
5. Appropriate handling of the political. The MTEF has no control over the timing and content of political commitments and policy decisions. They reflect political pressures at the time of their making. What it can do is cite existing commitments, identify where possible the timespan within which decisions must be taken and assess the size of their impact on MTEF projections. Inevitably, however, political circumstances have an exogenous impact on the credibility of the MTEF. All the MTEF can do is rely on clear, evidence-based argument. It is not the place for unsupported professions of intent.

Key features of the 2021 Medium Term Budget Policy Statement

Tables 1 to 4 set out MTBPS projections for Gross Domestic Product, main budget revenue and expenditure, indices of real expenditure per capita by function and debt. They show:

1. GDP at constant prices is projected to exceed the 2019 level next year. However, a growing population means that GDP per capita is projected not to reach the 2019 level by the end of the MTEF period, but to be 2.5% lower. As point estimates, the projections are reasonable and imply a potential growth rate of between 1.5% and 2.0% over the next three years. This is slightly above the 1.4% estimated for 2010-2020 in a recent Reserve Bank working paper[2].

2. Main budget revenue is projected to be roughly constant as a percentage of GDP from 2021/22 to the end of the MTEF period. No changes to tax rates are contemplated in the MTBPS. Main budget revenue per capita at constant prices follows GDP per capita closely, and is projected at 2.2% lower at the end of the MTEF period than in 2019/20.

3. Main budget expenditure excluding debt service is projected to shrink as a percentage of GDP from 2021/22 to the end of the MTEF period, from 26.3% to 23.5%, reflecting the intention to achieve fiscal consolidation from the expenditure side. This puts sharp downward pressure on real expenditure, reducing it to 93.0% of the 2019/20 level in 2024/25. Real expenditure per capita drops further, to 87.8% of its 2019 level. Moreover, this estimate is subject to movements upward above those projected for public sector wages, since this development will increase the GDP deflator and hence decrease the real expenditure per capita. 

4. To explore the expenditure side further, indices of real per capita [3]expenditure by function have been calculated and they are displayed in Table 3. It shows that expenditure on community development, post school education and training and economic development are relatively well protected, but the indices drop to below 90% for health, social protection and basic education and below 85% for general public services and peace and security. 

5. Gross loan debt rose rapidly between 2019/20 and 2020/21. It is projected to rise further to R5.5 trillion, 77.8% of GDP, in 2024/25. The debt to GDP ratio is projected to peak a year later, at 78.1% of GDP. The average rate of interest on the government debt is projected to rise from 6.2% in 2021/22 to 6.6% in 2024/25.

6. Two things are not funded. The first is any successor to the social relief of distress grant beyond its end in March 2022. It is hard to see opportunities for further expenditure compression, so to preserve the deficit and debt projection, it would be necessary to finance any successor through increased taxation. The second is national health insurance, where the MTBPS sees insufficient capacity in the health sector to work substantively on it.

Conclusion

The credibility of the MTBPS depends not only on the baseline projection, but also on the comprehensiveness and quality of its risk analysis. The second and third briefs will discuss the MTBPS from this perspective.

Charles Simkins
Head of Research
charles@hsf.org.za

Table 1

Table 2

Table 3

Table 4

[1] National Treasury, 2021 Medium Term Expenditure Framework, Technical Guidelines, n.d.

[2] J W Fedderke, Identifying Steady-State Growth and Inflation in the South African Economy, 1960-2020, Working Paper Series WP/21/14, 30 July 2021

[3] The population denominator varies by function. It is the population age 5-19 for basic education, 20-24 for post school education and training, and the entire population for all other functions. 

[4] Here, main budget expenditure excludes expenditure on debt service