Treasury gets a turn to be bailed out

In this year’s Budget it was National Treasury’s turn to be bailed out. Government will use a portion of the valuation gains in the Gold and Foreign Exchange Contingency Reserve Account to help mitigate fiscal risks by reducing borrowing over the medium term.

According to Finance Minister Enoch Godongwana, who delivered the Budget 2024 speech on Wednesday, Treasury is more upbeat about near-term economic growth and its fiscal projections have improved since the 2023 Medium-Term Budget Policy Statement (MTBPS).

However, Jee-A van der Linde, senior economist at Oxford Economics Africa, says as with the 2023 Budget, they think official revenue projections are too optimistic and to say that South Africa’s fiscal risks have diminished would be a gross misstatement.

“The Gold and Foreign Exchange Contingency Reserve Account (GFECRA) balance has grown from R1.8 billion in March 2006 to R507.3 billion in January 2024 because of a weaker ZAR/USD exchange rate.

“In terms of the proposed GFECRA settlement agreement between Treasury and the South African Reserve Bank (Sarb), the balance will be reduced by R250 billion, of which R150 billion is allocated to reduce government’s gross borrowing requirements and R100 billion will be distributed to the Sarb’s contingency reserve.”

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Economic lethargy in second half of 2023

Van der Linde says after faring better than expected in the first half of 2023, economic lethargy set in during the second half of the year as port congestion was added to South Africa’s growth impediment list.

“Treasury made minor downward adjustments to its 2023 real gross domestic product (GDP) growth estimate, which is now set at 0.6% (previously: 0.8%) but the forecast for this year was revised up to 1.3% (previously: 1.0%). Treasury’s current medium-term outlook is for the economy to expand by around 1.6% per year, slightly higher than our baseline of 1.3%.”

Consequently, Van der Linde says, official revenue forecasts have been revised higher. “Recent data releases have shown that domestic demand remains weak and we expect that will continue to be the case for most of 2024.”

Gross tax revenue for 2023/24 is estimated to come in at R1.73 trillion, which is R56.1 billion lower than the 2023 Budget projection. Gross tax revenue for 2024/25 is forecast to increase to R1.86 trillion, encompassing the R15 billion tax policy measures announced during the 2023 MTBPS.

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Weak economic state made it difficult to increase tax

Van der Linde says considering South Africa’s weak economic state, Treasury had limited room to increase tax collection, but nonetheless decided to lean on individual taxpayers with these main tax proposals:

• There will be no inflation adjustments to the personal income tax tables and medical tax credits.
• Excise duties on alcohol will rise by between 6.7% and 7.2%, while duties on tobacco products will go up by between 4.7% and 8.2%.
• No changes to the general fuel levy or the Road Accident Fund levy, resulting in tax relief of close to R4 billion.
• South Africa will implement a global minimum corporate tax, with multinationals subject to an effective tax rate of at least 15%, regardless of where profits are located.
• Domestic electric vehicle producers will be able to claim 150% of qualifying investment expenditures as an incentive to aid the transition to new energy vehicles.

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Budget deficit not reduced enough until now

According to Budget 2024, the consolidated budget deficit for the 2023/24 financial year is estimated at 4.9% of GDP, unchanged from the 2023 MTBPS. “However, we expect the budget shortfall will end up being wider due to weaker revenue growth during the final quarter of 2023/24 and due to increased spending,” Van der Linde says.

Treasury expects a slightly narrower budget deficit of 4.5% of GDP for 2024/25 and predicts the budget shortfall to narrow over the Medium Term Expenditure Framework (MTEF), reaching 3.3% by 2026/27.

Even so, van der Linde says, the latest budget projections are weaker compared to the 2023 Budget forecasts. Government notes that its balanced approach to fiscal consolidation involves expenditure restraint and moderate revenue increases, while continuing to prioritise social support and ensuring additional funding for critical services.

“Until now, this approach has not been successful in reducing the budget deficit sufficiently in order to stabilise government debt.”

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Government debt and borrowing

He points out that South Africa faces higher debt redemptions over the medium term, at a time when interest rates are high and revenue growth too weak. “Ongoing financial support to debt-laden state-owned enterprises (SOEs) complicates matters further. That said, there were no debt-relief measures announced for Transnet but we believe a financial arrangement is unavoidable.”

Government’s gross borrowing requirement in 2023/24 has increased by R37.6 billion to an estimated R553.1 billion from the 2023 Budget projection due to higher spending and lower revenue collection.

However, Van der Linde says, because of the GFECRA profits, the medium-term gross borrowing requirement will be R196 billion lower than projected in the 2023 MTBPS. Government will receive distributions of R100 billion in 2024/25, R25 billion in 2025/26 and R25 billion in 2026/27 from the Sarb, which will help reduce domestic market financing requirements and limit growth of debt stock and debt-service costs.

Even so, gross loan debt is forecast to increase from R5.21 trillion (equalling 73.9% of GDP) in 2023/24 to R6.29 trillion in 2026/27 (equating to 74.7% of GDP), peaking at 75.3% of GDP in 2025/26, he says.

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Better fiscal ratios, but what about misspending?

South Africa’s improved fiscal ratios will be welcomed, but the issue of misspending remains unaddressed. The outcome of the 2024 budget hinged on a few key things: a Transnet bailout would have compromised state finances further, while profits from the GFECRA would see the fiscus improve, Van der Linde says.

“Government opted for the easy way and tapped R150 billion of the valuation gains in the GFECRA, while kicking the Transnet matter down the road. The GFECRA profits, which will be distributed over the next three years, helps to offset the government’s net borrowing requirement and reduces debt-service costs.”

However, he says, government has not actually reduced spending nor is it borrowing less. “In fact, Treasury set aside a provisional R36.8 billion in 2026/27 for the social relief of distress grant to maintain the credibility of the fiscal framework, having provisioned R35.2 billion for 2025/26 during the MTBPS 2023.”

He says the key question remains whether government can stick to its expenditure targets, as this has not been achieved in the past. “Unaffordable wage demands by public sector workers, numerous SOE bailouts, rising borrowing costs and a growing need for social support are key factors that underpin our assumptions of higher expenditure growth over the coming years.”

In addition, Oxford Economics Africa is in two minds about the assumptions underpinning Treasury’s revenue forecasts, as current conditions are not conducive to growth and therefore it maintains a more pessimistic view of the budget balance over the medium term.

“Government has surely now exhausted all easy options, while the best ones, such as pro-business policy reform and ‘actual’ fiscal consolidation, remain too politically sensitive.”