MTBPS: No major surprises expected – economists

Finance Minister Enoch Godongwana will deliver National Treasury’s MTBPS or mini budget on Wednesday, the first budget since the formation of the government of national unity, but economists do not expect any surprises.

Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), says Godongwana will likely once again commit government to further fiscal consolidation by keeping expenditure in check in the Mid-Term Budget Policy Statement (MTBPS).

“This will not be an easy task and it will be interesting to see how Treasury deals with its assumption for growth in the public sector wage bill for example. It will also be of interest to see Treasury’s forecast for real and nominal gross domestic product (GDP) growth in the coming years.

“Just this week, the International Monetary Fund (IMF) released a forecast of 1.1% growth for this year (which is roughly in line with our thinking) and ‘just’ 1.5% for next year (which is lower than we have forecast).”

She points out that faster economic growth would be the only way to escape the need for more fiscal consolidation.

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Look for Treasury’s plan to deal with possible extension of SRD grant in the MTBPS

“On the expenditure side, we will look out for more insights on how Treasury is planning to deal with a possible extension of the social relief of distress (SRD) grant and how this could potentially be shaped into a (form of a) Basic Income Grant, as well as any provisions made for the National Health Insurance (NHI) over the medium term, although we do not expect much detail in this ‘mini-budget’.”

There might also be mention of the government tying itself more firmly to a so-called fiscal rule such as ensuring debt remains below a certain level of debt-to-GDP or maximum deficit per year, but again, such details are more likely in the National Budget in February next year (or even later), IJssel de Schepper says.

“On the revenue side, tax income growth has been somewhat slower than Treasury anticipated so far, but more revenue from higher-than-expected withdrawals following the introduction of the two-pot retirement system may counter this.”

She says the lower bond yields in recent months should benefit Treasury’s debt issuance dynamics over time, but due to the long-dated maturity of much of the country’s debt, this will take some time to feed through and only really help us if sustained.

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Slightly higher aggregate revenue growth?

Isaac Matshego and Busisiwe Nkonki, economists at the Ne3dbank Group Economic Unit, say they project slightly higher aggregate revenue growth in the current financial year as gross tax revenue is lifted by a robust increase in personal taxes and a marginal gain in corporate taxes.

However, they point out, that relatively subdued spending will contain value-added tax collections, with a slight shortfall likely for the financial year. “Overall, we estimate gross tax revenue to be R2 billion higher than Treasury’s February estimate, lifting aggregate revenue growth to 6.1%. “

They say the public sector wage bill will re-emerge as a significant drag on spending as government and public unions are in talks for wage settlements for 2025/26. The unions have tabled a double-digit figure, well above the 4.6% increase in the February budget numbers.

“Debt service costs will likely rise at a slightly higher rate than Treasury’s forecasts. Overall, we expect expenditure growth at 4.2% in this financial year compared to Treasury’s projected 4.4%. We estimate the consolidated budget deficit at 4.4% of GDP in 2024/25, slightly lower than the 4.5% projected in the 2024 National Budget.

“However, over the MTEF period, the deficit will be wider than estimated in February, mainly due to the higher wage bill in the next financial year. Encouragingly, the primary surplus will increase over the period.”

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Public debt ratio likely higher than in February budget estimate

They believe the public debt ratio is likely to be higher than the February 2024 estimate, primarily due to lower nominal GDP. They say Treasury could also announce changes to the inflation targeting framework by lowering the midpoint of the inflation target band to 3% from the current 4.5%.

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say they anticipate a stronger focus on Public-Private Partnerships (PPPs), a crucial strategy for bolstering private-sector involvement in public infrastructure projects as part of the reform agenda.

“This MTBPS will likely outline specific initiatives to enhance private-sector participation, supporting government’s goal of driving economic growth through collaborative investments.”

They point out that Treasury projected average economic growth of 1.6% over the forecast period in the 2024 budget, with 1.3% growth anticipated for this year, rising to 1.6% in 2025 and 1.8% in 2026.

“However, the 2024 growth forecast of 1.3% may be revised downward, given weaker-than-expected outcomes in the first half of the year. Despite this, medium-term growth projections for 2025 to 2027 will likely signal a modest recovery from 0.7% in 2023. Nonetheless, these projections may remain conservative and fall short of our modest 2.0% average forecast over the same period.”

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Will gross tax revenue live up to projections in the MTBPS?

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano point out that fiscal data for the first five months of the 2024/25 fiscal year shows gross tax revenue up 3.7% year-to-date compared to the corresponding period last year. This is below the projected 7.6% growth for the fiscal year, highlighting mixed outcomes across tax categories:

• Personal Income Tax increased by 11.7%, slightly below the projected 13.7% for 2024/25.
• Corporate Income Tax declined by 2.2%, falling short of the modest 0.4% growth target.
• Value-Added Tax (VAT) is down 0.7%, well below the 7.1% projected growth for the year. Additionally, the general fuel levy revenue decreased by 2.7%, a stark contrast to the 35.0% growth over the same period in 2023/24, indicating potential significant underperformance in this category.

Overall, they say the divergent performance across key tax categories suggests that gross tax revenue could fall below expectations by an estimated R19.8 billion. “This shortfall in the current fiscal year may also signal slightly lower revenue projections in the outer years.

“Non-interest expenditure is up 3.6%, closely tracking the 2024 Budget projection of 3.9% growth. However, there are significant expenditure risks, including the deteriorating balance sheets of municipalities and state-owned enterprises, which may lead to additional bailout demands.

“Meanwhile, debt-service costs have risen by 8.0%, outpacing the 7.3% growth forecast for the current fiscal year. This signals mounting spending pressures, compounded by subdued economic growth, which could widen the fiscal deficit for 2024/25 beyond the 4.3% of GDP projected in the 2024 Budget.”

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Fiscal deficit or fiscal cliff?

They expect the fiscal deficit to be around 4.4% of GDP or slightly worse. This, they say, together with growing debt redemptions, may either delay debt stabilisation or push the peak level above Treasury’s projection of 75.3% of GDP in 2025/26.

“The former would align more closely with our baseline scenario, which anticipates debt stabilisation only after 2025/26 when ongoing reforms are expected to boost growth above 2.0%.”