MTBPS: worse deficit, no major bailouts, but cuts to size of government

Finance Minister Enoch Godongwana confirmed in the medium-term budget policy statement (MTBPS) that the budget deficit had worsened, but there was no bailout for state-owned enterprises, while he promised cuts to government structures and size.

He emphasised that public finances were significantly weaker, with the main budget deficit increasing by R54,7 billion compared to the 2023 main budget estimates. The main budget deficit forecast for 2023 has worsened to 4.9% of gross domestic product (GDP), compared to the 4% estimated in the February budget.

The only major announcement in the MTBPS was the Social Relief of Distress (SRD) grant had been extended for another year at an additional cost of R34 billion.

Debt-servicing costs as a share of revenue will increase from 20.7% in 2023/2024 to 22.1% in 2026/2027.

No bailout was announced for Transnet, Eskom, Denel, the Post Office and SAA.

Spending has been revised down by R21 billion for the current financial year, while an additional R24 billion will be used for the 2023/2024 public sector wage increase and only for key departments such as education, health and police services.

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The plan to tackle government debt

The MTBPS contained National Treasury’s plan to tackle government debt by stabilising public finances, fast-tracking growth-enhancing reforms and reconfiguring the structure and size of the state, while strengthening its capacity to deliver quality public services.

When finance minister Enoch Godongwana delivered the Medium Term Budget Policy Statement on Wednesday, he emphasised that the economic outlook over the medium term remains weak due to power cuts, the poor performance of the logistics sector, high inflation, rising borrowing costs and a weaker global environment.

“Domestically, we forecast a 0.8% growth in real gross domestic product (GDP) in 2023, 0.1 percentage points lower than the growth projection at the time of the 2023 Budget. Growth is projected to average 1.4% from 2024 to 2026. These growth rates are not sufficient to achieve our desired levels of development.”

However, he said, our economy has shown signs of resilience, with real GDP now above pre-pandemic levels and the economy growing 0.9% despite record levels of load shedding. In addition, the tourism sector grew more than 70%, while agriculture expanded 7.8% and the construction, transport and communications sectors growing strongly.

“Unfortunately, since February, the risks to the economy that we warned about, including the decline in global commodity prices that granted us substantial revenue last year, elevated inflation and the Rand depreciation, have materialised,” he said.

As a result public finances are significantly weaker, with the main budget deficit increasing by R54,7 billion compared to the 2023 Budget estimates, reflecting lower revenue performance, higher wage bill costs and higher projected debt service costs.

Godongwana said the main reasons are a sharp fall in corporate income tax, particularly from the mining sector, although personal income tax collection was better than forecast.

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Worsening main budget deficit

The result of the shortfall is a substantial worsening in the main budget deficit in the current fiscal year and Treasury now projects a deficit of 4.9% of GDP compared to its previous estimate of 4.0%.

“Under these circumstances, measures to stabilise public finances and reform the economy to generate higher growth are essential.”

The minister said the most effective way of funding government was through an efficient tax administration and a broader tax base. Therefore, Sars will continue its focus on enforcing compliance in areas such as debt collection, fraud prevention, curbing illicit trade, voluntary disclosures and encouraging honest taxpayers to comply voluntarily.

“Every additional Rand of revenue collected is one Rand less which we have to borrow.”

The fiscal challenges are that government spending has exceeded revenue since the 2008 global financial crisis and these rising annual budget deficits means that government will borrow an average of R553 billion per year over the medium term. This means that the country’s gross debt will increase from R4,8 trillion in 2023/2024 to R5,2 trillion in the next financial year and surpass the R6 trillion mark by 2025/2026.

“We now expect gross government debt to stabilise at 77% of GDP by 2025/2026, higher than the level forecast in February. Over the next three years, debt-service costs as a share of revenue will increase from 20.7% in 2023/2024 to 22.1% in 2026/2027. The cost, or interest of this debt for next year alone amounts to around R385.9 billion. Over the MTEF, interest costs amount to R1,3 trillion.”

However, the minister said, debt levels and rising debt service costs are not problems in and of themselves.

“Our challenge is that rising debt services costs are crowding out important social spending and our economy has not grown fast enough to support increasing expenditure or our current debt levels.”

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Strategy for avoiding fiscal crisis

The strategy for avoiding a fiscal crisis and preventing the build-up of systemic risks to the economy include spending reductions and reprioritisation, as well as concrete steps to support growth.

Godongwana said limited public sector capabilities erode public trust in public institutions and waste scarce public resources, affecting service delivery and economic growth and action is being taken to review and reconfigure the structure and size of the state as the president promised in his 2023 State of the Nation Address.

“A joint plan to review government departments, entities and programmes over the next three years is being prepared to address overlapping mandates and functions, including in public entities and ensure that we create standards for more sustainable remuneration of executives that serve public entities receiving transfers from the fiscus.”

However, he emphasised that lowering debt and the budget deficit alone was not enough and therefore the MTBPS prioritises reforms to strengthen GDP growth, which is why funding for capital projects remains the fastest-growing item by economic classification. A new mechanism for improving the pace of delivery of capital projects was also announced.

Godongwana called on government to respect the budget constraint and preserve the sustainability of government services that are being crowded out by debt- service costs.

“We propose a strategy of spending adjustments based on policy priorities and a reconfiguration and rationalisation of the state, which includes closing or merging ineffective entities and programmes and enhancing the complementarity of its functions.”