Budget 2024: what business wants to hear

In this year’s budget speech on Wednesday afternoon the business sector wants to hear from finance minister, Enoch Godongwana, how government will restore its finances, drive infrastructure investment, handle the financial predicament of Eskom and Transnet and change tax rates.

Busi Mavuso, CEO of Business Leadership SA, says in her weekly newsletter that this week’s budget speech is more critical than ever for business sentiment.

“The financial performance of government has been a material risk that has at times damaged South Africa’s investment case. The rapid deterioration of the fiscal position during the Zuma years triggered fears that we were on a terminal path to bankruptcy.”

She says one of the achievements of the Ramaphosa government has been to restore some trust in the ability of National Treasury to run government finances.

“There has been a clear effort to rein in spending and turn the trajectory but the challenge is that our economy did not cooperate. From the Covid lockdowns to load shedding and the logistics crisis, growth consistently disappointed.”

That means the revenue side of the equation has not been able to deliver enough money to fully restore government finances and Mavuso says as a result the time when revenue will exceed expenses before interest payments (the so-called “primary surplus”) has consistently drifted outward, while gross debt as a percentage of gross domestic product (GDP) continued moving upward.

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When will point of primary surplus be achieved?

“This will be a key indicator I will watch in the budget speech. When will this point of primary surplus be achieved? It was meant to happen in the fiscal year ending now, but with revenue under pressure there are doubts it will succeed. If it does not, eyes will turn to whether it can in the year ahead, requiring clear spending discipline.”

Godongwana must make the case that Treasury will succeed, despite the myriad spending pressures it faces, especially in an election year, she points out and adds that there has also been much noise about using the country’s foreign reserves to help relieve pressure on government finances.

If that happens, it must be with strict and credible conditions, that make clear that the function of foreign reserves is to protect the country from international crises and maintain its credibility in the international financial system, she warns. “It is not a free money pot for government bailouts.”

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When will infrastructure investment start?

Mavuso says she will also watch out for government’s efforts to drive infrastructure investment.

“We heard a lot about it for many years, but still, it does not happen. Public spending in particular continued to decline throughout the period, while the private sector has been picking up the slack.”

That is largely a result of the financial collapse of Eskom and Transnet, but core public sector investment has also been weak, she says.

“Therefore, while spending must be reined in, it is important that we invest in our economic capacity and ensure the state can provide essential services like water and roads if we want to turn the trajectory of overall GDP growth.”

Treasury has been working on reforming the regulations for public-private partnerships (PPPs) to make them easier to use, Mavuso points out.

“This process has been going on for some time and it would be good to see clear announcements of changes to the regulations in the Budget.

“This would enable the private sector to become much more active in investing in public infrastructure, without putting government finances under strain. Perhaps we will hear more about the Infrastructure Finance and Implementation Support Agency that Godongwana announced in the Mid-Term Budget Policy Statement (MTBPS) but with little detail. This may be a positive intervention to promote better use of PPPs.

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Plans to handle Eskom and Transnet finances

Another aspect of the Budget that Mavuso will watch out for is how government will handle the financial predicament of Transnet and Eskom that continues to be a serious issue for their performance.

“We have seen a great deal of public money go to them, as well as other state-owned entities and yet their performance remains weak. Therefore, I do not expect Treasury to write any blank cheques for either, despite the importance of restoring their financial health. We need clear conditionality: requiring the two state behemoths to deliver on reforms before new funding is made available to them.”

She emphasises that the country cannot afford to pour more public money going into them without credible reforms.

“We have a plan on how the logistics crisis should be dealt with in the form of the Transnet roadmap that was approved by cabinet and made public earlier this month. It is a good plan, but Transnet must be fully committed to its implementation, which also means confirming the urgent appointment of its executive team. That should be a condition of any Transnet funding.”

Business is bringing its side to resolve the logistics crisis and Mavuso says R120 million was raised to help fund interventions by the National Logistics Crisis Committee.

“We are ready to work with government and Transnet to do what is needed, backing the reform effort with skills and resources. National Treasury can aid this effort as a key partner in resolving the logistics crisis.”

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Municipalities’ Eskom debt

Turning to Eskom, Mavuso says a part of resolving Eskom’s crisis is the effort to deal with municipal debt. National Treasury has been running a debt forgiveness programme with municipalities and Godongwana said at the MTBPS in November that municipalities representing 97% of the municipal debt had applied for debt relief.

“The programme is important for Eskom’s sustainability, as well as improving the fiscal management of municipalities. Relief comes with a set of conditions aimed at improving the financial resilience of municipalities and their ability to generate revenue, as well as building a culture of payment for services. I hope we will hear about the progress to get municipalities to stick with the programme.”

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More taxes in an election year?

In addition, business will be on the lookout for changes to tax rates as the more tax government collects, the less there is for the private sector to spend and investment. Mavuso says increasing taxes may seem to be one way to restore government finances, but the evidence is that behavioural shifts in response to higher tax rates undermine collections.

She believes the only tax that can reliably be increased to raise additional revenue is VAT, a regressive tax that affects the poor the most and she cannot see that happening in an election year.

Mavuso also warns that it is important to temper expectations of what the Budget can do.

“The days are gone when National Treasury simultaneously held the levers of key policy interventions to support growth, as well as the levers of government spending.”

She points out that the economy now depends on many parts of the state machinery pulling together, with Treasury only able to hold the purse strings.

“Broader economic policy is the ultimate way out of the low growth mess we are in, although sound fiscal management is a critical part.”