Fiscal prudence going off the rails
Government debt could reach 80% of GDP within two years and 90% by the end of the decade, weighing on the economy and the government’s ability to deliver services, economists warned ahead of finance minister Enoch Godongwana’s budget speech next week.
While Godongwana is likely to find ways to fund the debt in the short term — such as tapping into the government’s cash resources and the profits on SA’s foreign exchange reserves — it will become tougher to finance in the longer term.
Economists have warned, too, that any attempt to hike taxes in a very weak economy would be counterproductive.
“We think that the combination of spending pressures and revenue risks will postpone the government’s proposed fiscal consolidation, with deficits staying bigger than 5% of GDP,” HSBC economist David Faulkner said in a note.
He expects debt to rise to 80% of GDP by 2025/26 and to 90% by the end of the decade.
“Alongside a heavier redemption profile and Eskom debt relief, the government borrowing requirement could average 8% of GDP, pushing up SA’s sovereign risk premium and crowding out the public sector,” Faulkner said.
The most recent monthly figures show government revenue running well behind the estimates contained in the November medium-term budget policy statement, which Treasury had already revised down by R56bn.
PwC tax partner Kyle Mandy reckoned the Treasury would have to revise revenue down by a further R17bn.
Nedbank’s economists expect revenue will be more or less on track for the current fiscal year, but expect a shortfall of more than R80bn in 2024/25.
Mandy said the tax burden was at a record high in the last fiscal year, with SA’s personal income tax burden sitting well above the Organisation for Economic Co-operation & Development average.
At the same time, there is little sign of the spending restraint that Treasury requested of departments in a memo late last year, in which it told departments to find money for extra salary increases from within existing budgets as well as to cut all non-essential spending.
Monthly figures for the first nine months of the year show government spending up 7.7% against last February’s budget target of 3.5%.
And with public sector pay above budget, the pressure to increase social grants and grant a Transnet bailout, few expect Treasury to deliver on the ambitious medium-term spending cuts pencilled in in November.
Nedbank economist Isaac Mashego also expects a deficit of above 5%, against Treasury’s November projection of 4.9%. He said at a briefing this week the better indication was government’s borrowing requirement, which he estimated at 7.5% — including the Eskom debt relief and redemptions of maturing government debt, as well as a possible Transnet bailout.
The borrowing requirements will become ever harder to fund, with foreign investors having cut their holdings of local government bonds in recent years and limits on the capacity of domestic banks and financial institutions to absorb more.
Faulkner said Godongwana would probably find ways to relieve financing pressure in the short term, including depleting cash buffers to the lowest level since 2010 and tapping into some of the almost R500bn in the gold and foreign exchange contingency reserve account (GFECRA). He warned, however, that “would make prudent public finance decisions more difficult to implement in the future”.
Treasury told Business Day in an emailed response last month there would be an announcement on the GFECRA in next week’s budget. The Reserve Bank and Treasury undertook a review of the issue late last year, with the assistance of technical advisers from the IMF.
The GFECRA houses the unrealised profits or losses on SA’s gold and foreign exchange reserves and these are for the account of the Treasury not the Reserve Bank, which manages the reserves themselves. A rising gold price and depreciating rand have seen the GFECRA profits reach almost R500bn and there have been calls from
some fund managers and economists to realise a portion of these to reduce the government’s high cost of borrowing. Realising the profits would come at a cost that Treasury would probably have to bear. Still, the move would help lower borrowing costs and the borrowing requirement in the short term.
Godongwana pencilled in R15bn of tax hikes in November, which economists expect will come from “fiscal drag” (whereby the Treasury doesn’t compensate personal income taxpayers for the impact of inflation and so-called bracket creep) as well as from increases in smaller taxes such as the fuel tax.
Mandy said an increase in the VAT rate was the only real way the government could raise more revenue, but this was politically unpalatable.