Budget 2024 | Government holds firm on fiscal consolidation as growth outlook dampens

30 October 2024 - 15:41
By Khulekani Magubane
Tax revenue for 2024/2025 has been revised downwards by R22.3bn due to declining fuel levy contributions and lower VAT collections on imports. Stock image.
Image: 123RF/xtockimages Tax revenue for 2024/2025 has been revised downwards by R22.3bn due to declining fuel levy contributions and lower VAT collections on imports. Stock image.

The National Treasury had to lower its 2024 economic growth forecast from 1.3% in the 2024 budget to 1.1% but placed its growth outlook for the medium-term period from 1.2% in the preceding three years to 1.8% from 2025 to 2027.

This is according to the 2024 medium-term budget policy statement (MTBPS) tabled by finance minister Enoch Godongwana in parliament on Wednesday. It is the first MTBPS under the government of national unity (GNU).

Briefing reporters in parliament before his speech, Godongwana said the tone of the MTBPS was consistent with the fiscal consolidation commitments the government made in the previous administration.

“[There is] no change in the tone [of the MTBPS]. Why is there no change? For now, I would argue the major parties in the GNU are agreed on fiscal consolidation. We may disagree on the pace but we are on the same page regarding the consolidation. So there is no change to the tone.”

The growth forecast is consistent with that of the International Monetary Fund, which said in its Sub-Saharan Africa economic outlook report released last week it projected South Africa’s economy would grow by 1.3% in 2024 and 1.5% in 2025.

Tax revenue for 2024/2025 has been revised downwards by R22.3bn due to declining fuel levy contributions and lower VAT collections on imports. Main budget expenditure is expected to moderate from 28.6% of GDP in 2024/2025 to 27.6% of GDP by 2027/2028.

“This largely reflects fiscal consolidation measures implemented in recent years and slower growth projected in non-interest expenditure relative to GDP. Debt service costs are also projected to rise at a nominal annual rate of 6.9% over the MTEF [medium-term expenditure framework] period.”

The main budget primary surplus — when revenue exceeds non-interest spending — is projected to increase over the three-year cycle to ensure debt stabilises at 75.5% of GDP (R6-trillion) by 2025/2026 and the budget deficit will narrow from 4.7% of GDP in 2024/2025 to 3.4% of GDP by 2027/2028.

Debt service costs will reach R388bn in this financial year, meaning 22 cents of every rand government spends goes towards paying interest on debt.

The MTBPS noted the sovereign risk premium improved significantly between the end of February and late September from 327 basis points to 240 basis points after improved sentiments from the GNU while the 10-year bond yields declined by 153 basis points.

Treasury said government’s medium-term strategy would achieve fiscal sustainability by stabilising government debt, raising capital investment, protecting critical services, controlling the public service wage bill and limiting further SOE support.

The MTBPS noted an improvement in economic conditions in the second half of the year including the suspension of load-shedding, structural reforms of Operation Vulindlela — a partnership between Treasury and the Presidency to unlock red tape — taking hold, global inflation receding and the rand strengthening.

“The economy has since strengthened in response to the suspension of power cuts since March 2024, improved confidence after the formation of the GNU in June and better than expected inflation outcomes in recent months and reduced borrowing costs. All these factors are expected to continue supporting the economy over the period ahead.”

Treasury said structural reforms were needed to increase job creation as the official unemployment rate worsened to 33.2% in the first half of 2024.

Household consumption was expected to improve to 1.2% in 2024 compared with 0.7% in 2023 following growth in real incomes, improvements in real purchasing power and withdrawals from the two-pot retirement system.

The MTBPS warned risks to the fiscal outlook remained elevated in the medium-term. These included lower revenue growth due to global or domestic economic slowdown, a higher than expected public wage bill, high borrowing costs and persistent budget deficits.

TimesLIVE