A view on today’s budget speech by Sanisha Packirisamy, economist at Momentum Investments
21 Feb, 2024

Sanisha Packirisamy, Economist at Momentum Investments

 

 

Committing to maintaining sustainable public finances proves to be challenging amidst a geopolitically tense global environment, less favourable growth in the global economy, and persistent energy and logistics obstacles locally. These factors collectively jeopardise government revenue growth, widen the budget deficit, and increase the country’s debt ratio.

 

 

Increasing socio-political demands on the fiscus, coupled with a splintering voter base and the emergence of fringe parties catering to disenfranchised voters, presented significant challenges in presenting this budget, especially in an election year marked by declining support for the ruling party.

 

 

In addition to a politically fraught backdrop, the finance minister faces sluggish economic activity, pressure on revenue growth, rising expenditure demands and further financial failures at key state-owned entities. Meanwhile, the urgency to rebuild fiscal buffers to better withstand external shocks and exercise more prudent fiscal policies remains imperative to mitigate public finance risks, narrow the fiscal deficit and stabilise the nation’s debt ratio.

 

 

A couple of key focus points caught our attention. Firstly, the market went into the budget more bearish than Treasury on its medium-term fiscal outlook. Government’s estimate of the consolidated budget deficit of 4.5% for fiscal year 2024/25 came in better than expected compared with the Reuters market consensus of 5%. Treasury expects a narrowing of the deficit to 3.3% in the outer year of the medium-term framework, relative to a wider assumption of 4.2% by the Reuters consensus.

 

 

Secondly, after a significant adjustment in the November budget, government expects revenue to be R0.7 billion higher in the current fiscal year relative to the medium-term budget estimates. Nevertheless, relative to a year ago, revenues are likely to be R56.1 billion softer. This is largely owing to an undershoot in corporate income taxes and VAT, while personal income taxes have performed well in spite of rising consumer headwinds largely due to decent nominal wage gains. Government only introduced modest tax measures, as was expected, given the politically challenging year we face. The bulk of the revenue proposals comes from bracket creep and by not adjusting medical tax credits for inflation. Sin taxes were raised by around 7% for alcohol and around 6.5% on tobacco-related products. Further reprieve was given to the consumer in the way of no further fuel tax adjustments.

 

 

Thirdly, budget outcomes have highlighted a commitment to exercising fiscal prudency. Government expects us to reach a primary surplus this year which is anticipated to grow to 1.8% of GDP over the medium-term. While no permanent announcement was made regarding a fiscal anchor, achieving a debt-stabilising primary surplus will be considered as a key fiscal marker in the medium term. Government noted that the expenditure ceiling has been reduced by R21 billion in fiscal year 2024/25 and R28.1 billion in fiscal year 2025/26 (relative to February last year).

 

 

This is in spite of an additional R57.6 billion allocation over the medium term to honour the 2023 public service wage agreement. Real growth in the government wage bill is still nevertheless expected to decline by an average 0.1% per annum in the medium-term relative to a 5.4% real increase in capital outlays on average for the same period. Government’s civil service wage bill will still amount to a staggering 38.3% of non-interest spending by fiscal year 2026/27 while capex cutbacks in the near term are observable.

 

 

Lobby groups have continued to support an extension in the Social Relief of Distress grant in light of ongoing hardship for many South Africans. Government has provisionally allocated R35.2 billion for an SRD extension into fiscal year 2025/26 and R36.8 billion for fiscal year 2026/27. This is likely to buy government some time to further deliberate on a more permanent outcome. Pension and child grants are expected to increase by 0.1% and 0.3% respectively in real terms in the upcoming fiscal year, thereby protecting the vulnerable of society against inflationary pressures. Lastly on the expenditure side, despite political pressure to roll out the National Health Insurance, real spending on health declines at an average 1.2% per year in the medium term.

 

 

Government stuck its heels in the sand and did not allocate further bailout funds for strained state-owned entities. There is a realisation on the part of government that the private sector needs to be crowded in for financing and technical expertise, particularly in the area of infrastructure, to promote growth and employment. Moreover, the sale of non-core assets needs to be considered before any decisions are made on doling out additional funding.

 

 

Fourth, government has introduced a new funding mechanism to arrest the growth in debt and debt-servicing costs. At R82 711 per person, gross debt nevertheless remains high in SA and is now expected to peak at 75.3% by the fiscal year 2025/26, around 2% lower than previously.

 

 

Although plans to draw down the Gold and Foreign Exchange Contingency Reserve Account or GFECRA by R150 billion in the next three years assists in debt reduction and allows for debt-service costs to peak sooner, servicing government’s large debt pile continues to usurp more useful forms of expenditure in the budget, with government expected to pay R1.21 billion a day to service its debt by fiscal year 2026/27.

 

 

Treasury announced a slight decrease in issuance which, together with a more favourable debt and government budget deficit profile, was taken as positive news by the fixed income and currency markets. Given that we would have preferred that GFECRA funds be used for growth-enhancing opportunities, such as fixing Transnet to alleviate structural bottleneck in the logistics space, we remain concerned over gross borrowing requirements in the outer years. Particularly as GFECRA was largely utilised to offset the overrun in the government wage bill and further wage negotiations in outer years would continue to pose a risk to the expenditure (and hence debt) profile.

 

 

Finally, the pace of reform efforts continues to be disappointingly slow, particularly given the backdrop of sluggish economic growth, highlighting the urgent need for more vigorous implementation. Low growth poses fiscal risks, compounded by a dwindling support for the ruling party, a more fragmented voter base and growing socio-political demands on government resources. SA’s journey toward fiscal consolidation and debt stabilisation continues to be challenged by constrained growth prospects and escalating expenditure pressures, especially in addressing insufficient employment opportunities and aspirations for upward mobility.

 

 

While credit ratings are likely to stay stable in the short term, higher financing needs due to potentially weaker growth and a deteriorating fiscal position present potential medium-term downside risks to SA’s sovereign rating outlook down the line. In this regard, Treasury ‘s long-term fiscal risks, which include lower potential growth, difficulty in executing government’s borrowing strategy and spending pressures (particularly at local government level and at the state entities), remain key downside risks to the country’s creditworthiness.

 

 

ENDS

 

Author

@Sanisha Packirisamy
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