Fiscal consolidation ‘ to slow’
• Budget may show signs of slippage, says Old Mutual
Old Mutual Group says SA’s national budget, which will be presented in parliament on Wednesday, is one of the toughest budgets in years as it takes place against a backdrop of economic recovery efforts and possible fiscal slippage.
Old Mutual
Group chief economist Johann Els said on Thursday that he expected the Treasury to continue on a path to fiscal consolidation, albeit at a slower pace than previously envisioned,
“due to deteriorating fiscal ratios and the pressing need to balance economic recovery with fiscal prudence”.
“We expect a likely deficit of around 5.3% for the current fiscal year, a stark increase from 4.9% in November and the 4% target set in February 2023,” Els said.
“This adjustment indicates a challenging path ahead for fiscal consolidation, with heightened funding costs and medium-term expenditure risks such as public wage increases and the basic income grant looming large on the horizon.”
The 2024 budget — a foundational event in SA’s fiscal calendar during which finance minister Enoch Godongwana will outline the government’s financial and economic agenda for the year ahead — is critical as it will be steering a year of significant sociopolitical and economic rites of passage.
It plays a pivotal role in setting the direction for the country’s economic policies, spending priorities and fiscal strategies.
Els said Old Mutual expected revenue to be about R5.5bn lower than the November estimate, and expenditure about R18bn more than the November estimate, bringing the deficit to R23.5bn. “The deficit is likely R86bn bigger than budgeted in February 2023,” he said.
The Treasury announced in its medium-term budget that it would introduce measures to raise an additional R15bn in tax revenue in the 2024 budget.
Els said this was very small and could easily come from the usual excise tax increases and a fuel levy increase or perhaps a lower-than-usual adjustment for “bracket creep”.
There was an outside chance the tax increases could be larger than R15bn — perhaps if there was no fiscal drag relief for the upper-income groups, he said. This would make it a touch easier to reduce the deficit and would not significantly affect the election outcome.
The most recent monthly budget data from the Treasury shows government revenue running well behind the estimates contained in the November medium-term budget policy statement, which the Treasury had already revised down by R56bn.
In its latest Economic Outlook report, Standard Bank said that in the near term the fiscal forecast risk stems largely from the expenditure side, where very ambitious spending curbs were required to accommodate the increase from the 2023/24 wage settlement.
Standard Bank chief economist Goolam Ballim said the medium-term budget policy statement ’ s spending estimates implied that underlying spending — excluding interest payments, wages and support for state-owned entities — hardly grew in 2023/24, with the nominal growth forecast for 2024/25 undershooting inflation.
“We ’ re inclined to give Treasury the benefit of the doubt given the relative success in implementing planned curbs in the past. Overspending has in the recent past been owing to the introduction ‘ by politicians’ of new policies rather than general overspending on the set budgets. Our estimate of seasonally adjusted spending trends [has] been steady in recent months,” Ballim said.
Standard Bank foresees the main budget deficit at 4.7% of GDP in 2023/24, with a likely improvement to 4.3% in 2024/25. The bank expects debt to stabilise at about 78% of GDP.
Els said Old Mutual Group expected to see lower revenue collection, exacerbated by underperforming corporate tax receipts and increased government spending.
He said the government needed to consider pragmatic revenue enhancement measures and expenditure cutbacks, cautioning against the potential socioeconomic consequences of broad tax hikes.
“Innovative fiscal strategies, including the judicious use of the gold & foreign exchange contingency reserve account and the implementation of growthenhancing policy measures, could be key to navigating the fiscal tightrope,” he said.
The account, abbreviated as GFECRA, holds the unrealised profits on SA’s foreign reserves. The significant weakening in the rand exchange rate over the past decade has meant huge profits
on the rand value of the reserves. The account currently sits at about R500bn and its profits accrue to the government.
“This is a potential source of funding for government but due to a number of complications, it is not a simple matter. The SA Reserve Bank would not want to sell reserves to realise profits,” said Els.
This issue had been discussed and studied by Treasury and the Reserve Bank, he said.
“While it is likely that there will be some mention of the GFECRA, it is unlikely that there will be an immediate use of the funds.”
He added that if there was a withdrawal of funds from the GFECRA, there would also be very strict conditions. “Only a very small portion could be used for a very specific reason, perhaps R50bn for a Transnet cash injection, or a slightly larger transfer to government coffers that could reduce crucial fiscal ratios.”
Other big-risk expenditure line items include the public sector wage bill, support for Transnet and the social relief of distress grant.