MTBPS: No positive story for Godongwana to tell

Finance minister, Enoch Godongwana, will not have a positive story to tell when he delivers the Medium Term Budget Policy Statement (MTBPS) on Wednesday. There will also be no room for unbudgeted expenditure and further bailouts for state-owned entities.

The MTBPS is a government policy document that communicates the economic context for the forthcoming budget, along with fiscal policy objectives and spending priorities over the three-year expenditure period.

Economic research group, Oxford Economics Africa, warns that South Africa’s fiscal position remains a significant risk.

“Diminishing revenue performance amid power supply and logistic constraints, as well as a moderation in key export prices, has rekindled concerns about the fiscus. Misspending, as opposed to just excessive expenditure and poor revenue growth have contributed to the precarious financial position,” Jee-A van der Linde, senior economist, says.

While the weak economic growth environment requires government to cut back on spending, government may instead opt for a combination of cuts and tax adjustments, with the general election coming up.

Government debt will also be a focus point, in the MTBPS as Treasury’s failure to stop the surge in government debt is a perennial concern.

“The narrative around debt stabilisation also changed during the 2023 Budget after the finance minister announced notable debt relief for Eskom and now Transnet reportedly also asked for a similar government bailout.”

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Eskom and Transnet biggest risk to economic growth

Van der Linde says these two parastatals present the biggest risk to economic growth due to their size and strategic importance.

“We forecast that government debt will stabilise at much higher levels of around 84% of gross domestic product (GDP). Debt service costs are forecast to rise further over the medium term and crowd out spending on salient areas that could have otherwise helped to foster faster economic growth.”

PwC says in its latest South Africa Economic Outlook that South Africa’s fiscal environment has deteriorated since the Budget in February.

“We expect a total tax revenue shortfall of up to R30 billion in 2023/2024. That is a significant improvement over an earlier prognosis of around R50 billion, following strong collections of 10.4% more compared to a year ago of corporate income tax during August that included the first provisional tax payments for companies with February year-ends.”

PwC says the MTPBS must specifically comment on how the 2023/2024 funding gap will be addressed. “The finance minister has indicated that spending cuts and increased borrowing and not higher taxes can be expected.”

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‘Darkest period before dawn’ for this MTBPS

Tertia Jacobs, treasury economist at Investec, says the current fiscal year could be seen as the ‘darkest period before the dawn’.

“The South African socio-political environment makes Treasury’s ability to enact spending reforms more challenging.

“The two domestic drivers are the energy and transport logistics crises, as well as the negative feedback loop created by underperforming SOEs and government bailouts which together with a drop in commodity prices and a spike in US Treasury yields internationally, have put additional strain on an already stressed economy and funding costs.”

Jacobs says fiscal slippage is still expected despite the reconfiguration of the state and a cut in programmes that can be implemented after the general election. This consists of the extent of the increase in the public sector wage bill in the current fiscal year and the magnitude by which savings and under spending can counter the increase.

“Over the medium term, the carry through effect from the unbudgeted wage increase together with the evolvement of social spending, (the size and shape of the Social Relief of Distress Grant and the ongoing financial and operational distress at SOEs) are major risks to fiscal sustainability.”

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Wider deficit and higher debt in MTBPS

The Nedbank Group Economic Unit expects a wider deficit and higher debt due to subdued revenue growth and higher wage bill and debt costs.

“For 2023/24, we expect a shortfall in taxes of around R47 billion accompanied by higher expenditure of R56 billion, pushing the deficit to 5.5% of GDP, markedly higher than the National Treasury’s target of 4%.”

The group does not expect any major revenue measures, while budget developments over the remainder of the financial year will determine whether we can expect tax changes in the February 2024 budget statement. In addition, the group expects that government will discontinue the solar panel tax rebates as load shedding becomes less intense.

“National Treasury faces the challenging task of ensuring that the higher public sector wage bill and debt service costs do not significantly widen the budget deficit and push the public debt stock even higher.”

The group says to achieve this, government will have to contain spending growth in most areas and cut spending in non-essential areas.

“We expect the significant rise in spending and lower tax collections will widen the budget deficit to more than 5% in 2023/24 and remain wide over the mid-term, which will push the debt ratio to above 75% by 2025/26.”