Godongwana walks a tightrope but likely to disappoint

The budget speech today will be a game of give and take, with Finance Minister Enoch Godongwana expected to do much more taking than giving as he tries to find additional revenue to fund the increasing debt levels and South Africa braces for a wider budget shortfall.

As with the 2023 medium-term budget policy statement (MTBPS), Godongwana will not have a positive story to tell, Jee-A van der Linde, senior economist at Oxford Economics Africa, says.

“A critical issue for the upcoming budget is how National Treasury plans to deal with embattled Transnet, while questions remain about when and how it might access the unrealised profits of the

Gold and Foreign Exchange Contingency Reserve Account [GFECRA].”

There are also contentious issues surrounding potential tax increases to boost revenue without placing too much additional pressure on South Africans, considering the ongoing cost-of-living crisis, he says.

“We maintain the 2023 MTBPS gave a bleak update about South Africa’s finances and argue that, despite Treasury’s proposed spending cuts, market euphoria was overdone.

“Indeed, the cumulative government shortfall for the first nine months of the 2023-24 fiscal year is equal to 5.7% of gross domestic product [GDP], compared to government’s forecast of -4.9% of GDP for 2023-24 as a whole.”

Given the economy’s weak performance, Van der Linde says, Oxford Economics anticipates further fiscal slippage, forecasting the budget deficit to come in at 5.5% of GDP in 2023-24 and 5.3% in 2024-2025.

“High spending pressures, due to underperforming state-owned enterprises, hostile public sector wage demands and social support, balanced against a weak domestic economic outlook mean the budget deficit will remain wider than Treasury’s average projection of 4.1% of GDP over the medium-term expenditure framework.”

Treasury is set to announce R15 billion in tax measures, but he does not expect the corporate tax rate to increase and doubts personal income tax will increase further.

Government would also want to avoid increasing VAT as far as possible ahead of this year’s elections, therefore he expects Treasury to target increases which consumers tend to be less aware of.

Government’s apparent desperation to find alternative sources of revenue is evident in Treasury’s exploration of tapping a portion of the roughly R500 billion GFECRA.

“In principle, such a move is not unseemly per se, but rather an easy way out and a temporary fix.”

Van der Linde says it is clear that Treasury is scrambling for cash and plugging the holes in an economy that is misfiring.

Godongwana will no doubt try to appease markets, but will more than likely disappoint.

“Markets and international rating agencies will focus on Treasury and how it plans to reduce state spending, increase revenue without killing an already ailing economy and manage bulging levels of debt, debt servicing and deficits.”

While Godongwana has demonstrated pragmatism, he is a member of the ruling ANC and bound by its overall policy principles and objectives.

So, his hands are tied by the restraints of party policy, global realities, economic imperatives and rising discontent on the political front ahead of elections.

The deficit will remain wider than projected