Two key take-aways from the 2024 Budget Speech
22 Feb, 2024

Farzana Bayat, Portfolio Manager at Foord Asset Management



Faced with some very harsh realities – from a severely constrained economy and infrastructure challenges to lower commodity-driven revenue and expenditure running well above target – Minister of Finance Enoch Godongwana’s Budget Speech was a mixed bag. At R1.73 trillion, tax revenue for 2023/24 is R56.1 billion lower than estimated in the 2023 budget; a shortfall largely attributed to the decline in corporate profits and revenue from taxes on mining. National Treasury did project optimistic revenue increases of R104 billion over the medium term however; this is due to higher tax buoyancy rates.



National government’s gross borrowing requirement will decline, from R553 billion in 2023/24 to R428.5 billion in 2026/27; with debt peaking at 75.3% of GDP in 2025/26 – down from the 77.6% forecast at the Medium Term Budget Policy Statement (MTBPS). The decline in borrowing and lowering of debt ratios were driven by the use of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA), which reduces the funding National Treasury requires to meet its commitments.



The pressure was on Godongwana to give South Africans some good news; especially in an election year. But this didn’t come for big business or individuals. With tax tables not being adjusted for inflation, an effective tax increase for individuals was announced; bringing in as much as R20bn in additional revenue. Godongwana also confirmed that multinational corporations with an annual revenue exceeding €750 million (R15.2 billion) would be charged an effective tax rate of at least 15%, regardless of where the profits are generated. The proposed reform is expected to yield an addition R8 billion in corporate tax revenue in 2026/27.



He also didn’t shy away from addressing topical issues like the possibility of a permanent basic income grant, the funding of the controversial National Health Insurance (NHI) and an increase to the public sector wage bill. He announced that R251.3 billion would be added to spending on salaries of teachers, doctors, nurses, police and other public servants. The aim, however, is to offset this large wage bill increase with proposed departmental cuts of R206bn.



Additionally, Godongwana outlined that government would allocate R1.4 billion for the NHI grant. While he stressed that this budget allocation demonstrates government’s commitment to the NHI policy, he noted that further development is needed before universal healthcare strategy can be deployed at scale.



During his recent State of the Nation Address, President Cyril Ramaphosa announced the extension and improvement of the R350 Social Relief of Distress [SRD] Grant, which was introduced during the pandemic and currently supports 9 million unemployed people monthly. On this matter, National Treasury has allocated R33.6bn for the current year and has set aside R35.2bn and R36.8bn for the continuation of the grant until 2027.



Here are some of the other key take-aways from the 2024 Budget Speech.



#1 Tapping into GFECRA



At present, our debt service costs are on an unsustainable path, represent the country’s fastest growing expenditure item and are also significantly higher than those of our peers. South Africa is currently spending around 20% of our revenue on interest payments. As many predicted, Godongwana announced that government would be drawing from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to provide critical short-term funding relief. A total of R150 billion will be utilised, with R100 billion realised in 2024, a further R25 billion in 2025 and the final R25 billion in 2026. This is a positive step; particularly because the R150 billion withdrawn from GFECRA will be used to redeem debt and not to fund additional spending. But even with the usage of GFECRA, the country’s debt servicing costs remain higher than most.



While this approach does offer some relief, it fails to solve the issue at hand – overspending and rising debt. It is important to note that these reserves are not infinite. Put simply, if growth remains weak and if spending continues on its current trajectory, deficits and debt levels will only continue to escalate.



#2 No SOE bailouts, private sector collaboration enabled



Transnet was issued a government guarantee of R47 billion at the end of last year. There was an expectation that Transnet might get a debt transfer arrangement similar to Eskom but this did not materialise in the budget. But there was some good news for the rail, port and pipeline company.



Godongwana highlighted that a private partner has already been secured to upgrade Pier 2 of the Durban Container Terminal, which should increase private investment in equipment, enhance technological capability and improve operational efficiency. Eskom’s bailout was also reduced by R2 billion due to the energy utility’s non-compliance with certain bailout conditions.



On the whole, Godongwana’s budget was optimistic but there still remain upside risks to expenditure and revenue forecasts. While tapping into GFECRA provides some essential short-term relief, the reality is that we are just kicking the can down the road if we don’t meaningfully come up with solid strategies to encourage economic growth and materially reduce government debt.







@Farzana Bayat
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