Treasury bailed out

MINISTER: DEPT MORE UPBEAT ABOUT NEAR-TERM ECONOMIC GROWTH

Gross borrowing requirement by govt increasing by R37.6bn to R553.1bn.

It was National Treasury’s turn to be bailed out. Government will use a portion of the valuation gains in the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to help mitigate fiscal risks by reducing borrowing over the medium term.

Finance Minister Enoch Godongwana said in his budget speech yesterday that Treasury was more upbeat about near-term economic growth and its fiscal projections have improved since the 2023 medium-term budget policy statement (MTBPS).

However, Jee-A van der Linde, senior economist at Oxford Economics Africa, says as with the 2023 Budget, official revenue projections are too optimistic and to say SA’s fiscal risks have diminished would be a gross misstatement. “The GFECRA balance has grown from R1.8 billion in March 2006 to R507.3 billion in January 2024 because of a weaker rand/ dollar exchange rate.

“In terms of the proposed GFECRA settlement agreement between Treasury and the SA Reserve Bank (Sarb), the balance will be reduced by R250 billion, of which R150 billion is allocated to reduce government’s gross borrowing requirements and R100 billion will be distributed to the Sarb’s contingency reserve.”

Van der Linde says after faring better than expected in the first half of 2023, economic lethargy set in during the second half of the year as congestion at the ports was added to SA’s growth impediment list.

“Treasury made minor downward adjustments to its 2023 real GDP growth estimate, which is now set at 0.6% (previously: 0.8%) but the forecast for this year was revised up to 1.3% (previously: 1.0%). Treasury’s current medium-term outlook is for the economy to expand by around 1.6% per year, slightly higher than our baseline of 1.3%.”

Consequently, Van der Linde says, official revenue forecasts have been revised higher. “Recent data releases have shown that domestic demand remains weak and we expect that will continue to be the case for most of 2024.”

Gross tax revenue for 20232024 is estimated to come in at R1.73 trillion, which is R56.1 billion lower than the 2023 Budget projection. Gross tax revenue for 20242025 is forecast to increase to R1.86 trillion, encompassing the R15 billion tax policy measures announced during the 2023 MTBPS.

Van der Linde says considering South Africa’s weak economic state, Treasury had limited room to increase tax collection, but nonetheless decided to lean on individual taxpayers with these main tax proposals:

There will be no inflation adjustments to the personal income tax tables and medical tax credits.

Excise duties on alcohol will go up by between 6.7% and 7.2%, while duties on tobacco products will rise by between 4.7% and 8.2%;

No changes to the general fuel levy or the Road Accident Fund levy, resulting in tax relief of close to R4 billion;

SA will implement a global minimum corporate tax, with multinationals subject to a tax rate of at least 15%, regardless of where profits are located; and

Domestic electric vehicle producers will be able to claim 150% of qualifying investment expenditures as an incentive to aid the transition.

According to 2024 Budget, the consolidated deficit for the 20232024 financial year is estimated at 4.9% of GDP, unchanged from the 2023 MTBPS. “However, we expect the budget shortfall will end up being wider due to weaker revenue growth during the final quarter of 2023-2024 and due to increased spending,” Van der Linde says.

Treasury expects a slightly narrower budget deficit of 4.5% of GDP for 2024-2025 and predicts the budget shortfall to narrow over the medium-term expenditure framework (MTEF), reaching 3.3% by 2026-2027.

Government’s gross borrowing requirement in 2023-2024 has increased by R37.6 billion to an estimated R553.1 billion from the 2023 Budget projection due to higher spending and lower revenue collection.

However, Van der Linde says, because of the GFECRA profits, the medium-term gross borrowing requirement will be R196 billion lower than projected. Government will receive distributions of R100 billion in 20242025, R25 billion in 2025-26 and R25 billion in 2026-27 from the Sarb, which will help reduce domestic market financing requirements. – inao@citizen.co.za

To say fiscal risk has diminished, is a gross misstatement