As finance minister Enoch Godongwana tables his 2023 medium-term budget policy statement in parliament on Wednesday, observers are making peace with the possibility that the government will have to raise borrowings to support the economy, but maintain that there should be no new taxes.
The tabling of the medium-term budget comes amid a tough economic environment compounded by continued load-shedding, crippling logistical constraints at Transnet and the SA Revenue Service’s revenue collections underperforming February projections by R22bn.
With the likelihood of reduced spending by the government low ahead of next year’s election and households too burdened to absorb new taxes, the National Treasury has been considering alternatives, including tapping into the R459bn Gold and Foreign Exchange Contingency Reserve Account.
Treasury economist at Investec Tertia Jacobs said the bank will focus on the size of the revenue shortfall, revisions made to expenditure, and how these developments impact the borrowing requirement.
“There are several dynamics at play. There has been slow progress in the Treasury’s fiscal consolidation plan, helped by the revenue windfall receipts in the previous two years. But the slowdown in economic growth on account of the electricity and freight logistics crisis, slow implementation of reforms and lower commodity prices have impacted tax receipts, especially from corporates,” said Jacobs.
Jacobs said the ability to stabilise an increase in debt will be determined by a rebound in growth, which is contingent on fixing South Africa’s infrastructure and state-owned enterprises, and public-private partnerships.
“On the expenditure side, the public sector wage increase, which was not in the baseline forecast, and the ongoing requirement from state-owned enterprises for cash injections continue to present challenges,” Jacobs said.
The minister needs to outline clear measures to ensure available funds are spent efficiently and to curtail expenditure.
— Cas Coovadia, Business Unity South Africa CEO
Jacobs said the government’s debt-to-GDP ratio, which the Treasury projected to reach 72.2%, is likely to accelerate to 76% or 77%, without considering assistance to Transnet, which has requested financial assistance of R100bn.
She said the implementation of Transnet’s road map, restoring electricity supply and addressing the developing water crisis were critical for potential growth to rise above 0.5%.
She said this requires a solution to parastatals, where cash injections reached 20% of government spending in the previous fiscal year. She said with an election next year, fiscal slippage was likely, but it is a question of how much.
“The minister of finance provided guidelines, which included the freezing of vacancies [in the public service]. This, together with underspending of the capital budget, could probably counter some of the R37.5bn increase in the public sector wage bill,” she said.
Business Unity South Africa CEO Cas Coovadia, said while businesses were working with the government to solve the energy, logistics, crime and corruption crises, political will was needed for clear policy, removal of investment barriers and consumer confidence.
“The cost of servicing the debt is now the single largest expenditure item in the budget. At the same time, the South African Reserve Bank has forecast a mere 1% growth in GDP in 2024, which is insufficient to generate the revenue needed for the social and economic expenditure of the country,” said Coovadia.
Coovadia warned that South Africa faced a growing tax revenue shortfall due to weak household finances, low business confidence, low investment, lower global commodity prices and a weak rand.
“The minister needs to outline clear measures to ensure available funds are spent efficiently and to curtail expenditure, which has to include deep and substantial cuts in spending on non-essential and non-productive programmes, the shelving of unfunded prestige projects and linking future public sector wage increases to inflation.
“These measures must have the support of the rest of the cabinet, which must speak with one voice to boost public confidence in the government’s commitment to responsible management of the economy,” Coovadia said.
He said while Godongwana had no choice but to raise more debt for capital investment, the increase in debt must be kept under control and come with economic reforms to encourage private sector investment.
Coovadia said South Africa’s tax-to-GDP ratio is already among the highest in the world and that increasing taxes would burden households and hobble economic growth further.
Speaking at the annual Kgalema Motlanthe Inclusive Growth Forum last week, Godongwana warned that South Africa had a massive debt of R4.3-trillion and the fiscal space to service it was vanishing amid low growth.
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