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The Budget Speech on Wednesday will be a game of give and take, with finance minister Enoch Godongwana expected to do much more taking than giving as he tries to find additional revenue to fund the increasing debt levels as South Africa braces for a wider budget shortfall.
Jee-A van der Linde, senior economist at Oxford Economics Africa, says.
“A critical issue for the upcoming budget is how National Treasury plans to deal with embattled Transnet, while questions remain about when and how Treasury might access the unrealised profits of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA).”
There are also some contentious issues on potential tax increases to boost revenue without placing too much additional pressure on South Africans considering the ongoing cost-of-living crisis, he says.
“We maintain that the 2023 Medium-Term Budget Policy Statement (MTBPS) gave a bleak update about South Africa’s finances and argue that, despite Treasury’s proposed spending cuts, market euphoria was overdone. Indeed, the cumulative government shortfall for the first nine months of the 2023/24 fiscal year is equal to 5.7% of gross domestic product (GDP) compared to government’s forecast of -4.9% of GDP for 2023/24 as a whole.”
Given the economy’s weak performance, Van der Linde says, Oxford Economics anticipates further fiscal slippage and forecast the budget deficit to come in at 5.5% of GDP in 2023/2024 and 5.3% of GDP in 2024/2025.
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“High spending pressures, due to underperforming state-owned enterprises (SOEs), hostile public sector wage demands and social support balanced against a weak domestic economic outlook, mean the budget deficit will remain wider than Treasury’s average projection of 4.1% of GDP over the Medium-Term Expenditure Framework (MTEF). “
Van der Linde says Treasury is set to announce R15 billion in tax measures, but he does not expect the corporate tax rate to increase and he doubts that Treasury will increase personal income tax further given the weak economic state.
Government would also want to avoid increasing VAT as far as possible ahead of this year’s elections and therefore he expects Treasury to target other indirect increases which consumers tend to be less aware of instead.
He points out that government’s apparent desperation to find alternative sources of revenue is evident in Treasury’s exploration of tapping a portion of the roughly R500 billion GFECRA.
“We argue that in principle such a move is not unseemly per se, but rather an easy way out and only a temporary fix.
“Furthermore, we have pointed out that it has become more widely apparent to others that government debt as a portion of GDP will breach the 80% threshold over the next few years and Treasury’s proposals for Transnet will be significant in this regard.
“We still believe that government debt will reach 85% of GDP over the medium term. Treasury expects gross loan debt to stabilise at 77.7% of GDP in 2025/2026, which is 4.1 percentage points higher than anticipated in February 2023.”
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Van der Linde says it is clear that Treasury is scrambling for cash and plugging the holes with an economy that is misfiring.
“Godongwana said he will give an update regarding additional measures to anchor fiscal policy and ensure confidence over the long-term path for public finances.”
Godongwana will no doubt try to appease markets, but he will more than likely disappoint, Van der Linde says.
“Markets and international rating agencies will focus on Treasury and how it plans to reduce state spending, increase revenue without killing the already ailing economy in the process and manage bulging levels of debt, debt servicing, and deficits.”
He says while Godongwana has so far demonstrated pragmatism, we must remember he is also a member of the ruling ANC and bound by its overall policy principles and objectives. Therefore, his hands are tied by the restraints of party policy, global realities, economic imperatives and rising discontent on the political front ahead of national elections.
“Godongwana will not face a series of easy choices, with SOEs continuing to rack up significant losses despite turnaround plans. The best we can hope for is a palatable budget that prioritises fiscal consolidation and administers a dose of that “tough love” for mismanaged SOEs that the minister mentioned previously.”
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Lisette IJssel de Schepper, senior economist at the Bureau for Economic Research (BER), says it will be a daunting task for Godongwana to present a budget that keeps government expenditure in check in the face of a sluggish economy and in an election year, while ‘finding’ the additional revenue needed to curtail the increase in debt levels.
“On the expenditure side, [more] support for SOE, especially Transnet, will be important to look out for. Treasury has already extended the guaranteed loan facility to Transnet, but it still needs R100 billion for corridor investment.
“However, unlike straightforward bailouts, as we have seen with other SOEs in the past, it seems that government is more open to private sector participation in the logistics space. It would be welcomed if we saw a mechanism that brings in private partners and development finance institutions.”
She points out that the president hinted in the State of the Nation Address that the SRD grant could be extended and improved, while he also spoke about National Health Insurance.
“We are not expecting any major moves in this budget, with Treasury likely being firm on additional expenditure streams only possible with sufficient, sustained revenue.”
In addition, the president mentioned some funds, including the Climate Change Response Fund, that would need ‘funding’.
“There could be more in the Budget Speech on the need for a new, more credible fiscal anchor with the current expenditure ceiling not a hard ceiling. There is also likely going to be mention of the need for government to reconfigure or shrink, although beyond promises to keep the wage bill in check, we do not expect more news in the Budget.”
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When it comes to revenue, the BER also suspects that there could be an announcement on using the gold and foreign exchange contingency reserve account.
“The markets would actually welcome a prudent approach to use some of the funding, such as paying off some foreign debt, coupled with clear guidelines on how the funds could be used.”
She also refers to the need identified in the MPTBPS for a further R15 billion.
“While you could ‘get there’ by lifting the VAT rate or pushing up corporate or personal tax rates, we think this is unlikely to happen this year for a variety of reasons. It will likely be achieved by bracket creep and the hope of increased efficiency in tax collection.”
De Schepper says the BER is much more downbeat than Treasury’s latest although by now outdated, debt projections.
“With revenue likely to be less than estimated in the MTBPS and spending more, the picture should be worse than presented in November last year when Treasury had debt peak at 77.7% of GDP in 2025/26 and then very slowly taper off. We only see a peak two years after that, with debt having risen to about 83% of GDP by then.”
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