Bad news budget policy speech by minister

Minister Enoch Godongwana said economic activity remained severely limited by continued shortages of electricity, deteriorating freight rail performance and slow port operations, writes

The medium-term budget policy (MTBP) framework was presented to Parliament in November this year by Finance Minister Enoch Godongwana. The MTBP is usually a non-event as it just reviews government performance and explains why targets set in the main budget were not reached.

This year’s speech by Godongwana was different. In a presentation to Parliament, former chief of the parliamentary budget office Michael Sachs emphasised that this year the framework was not a review of the budget, but actually proposed large changes to the budget.

GOVERNMENT DEBT

Government debt is out of control. According to Godongwana, government debt would grow to R6 000 billion in 2025/26 to equal 77% of the GDP, higher than the 73% predicted in the February budget. Government debt has grown by 47% since 2008. Government income depends on economic growth. Individuals and businesses need to increase their economic activity so that they can increase their income and their payment to government in terms of various taxes. The minister said economic activity remained severely limited by continued shortages of electricity, deteriorating freight rail performance and slow port operations. Since the 2023 budget, corporate tax income decreased as economic activity slowed down.

Government expenditure consists of capital expenditure, debt service cost and running expenditure. Government salaries are a major part of government expenditure. Our government salary account is higher than in many prosperous countries. Figures provided in the MTBP show that the number of government officials earning more than R1 million per year increased from 10 000 to more than 55 000 in the past 10 years. In the 2023 budget there were no provision for increasing government salaries. However, government salaries were increased by 7,5% in March 2023.

The cost of servicing the growing fiscal debt is growing. Debt service cost is estimated to reach R386 billion in 2024/25 and R456 billion in 2026/27. As the debt increases, investors are getting worried about the risk of investing in South Africa. The increase in debt service cost and government salaries leaves less money for capital investment in infrastructure.

Debt grows when expenditure exceeds income, and lower debt can only be achieved by decreasing expenditure and increasing income. It is very likely that government will increase salaries and social grants before the general election next year. There are no signs of government trying to curb current expenses. In the week after the MTBP speech, news about the cost of flying President Cyril Ramaphosa and his entourage to France hit the newspapers.

The failure of parastatals, in spite of billions used by government in rescue attempts, clearly illustrates that government should leave these in the hands of the private sector. However, government is busy planning a national health service and has recently published a proposal for a state-owned oil company, apparently because countries like Russia and Malaysia have government-owned fuel companies.

Government income depends on a growing economy. Businesses struggle to perform with the deteriorating national infrastructure and lack of government services. Instead of promoting business growth, government continues to invent new rules to limit business growth. In agriculture, proposed new water-licence and existing export permit requirements discourage growth in the sector.

WAY FORWARD

Treasury projects a 5% increase in government revenue from 2022/23 to 2023/24. This does not look realistic if compared with their estimate of 0,8% GDP growth in 2023 and 1% in 2024. The only way in which this can be achieved is through higher taxation. The danger of this is that personal taxation has already reached the level where it inhibits economic activity.

OFFICIALS EARNING MORE THAN R1 MILLION/YEAR INCREASED TO MORE THAN 55 000

In the run-up to next year’s election, one can expect a lot of short-term measures to please the voters. The budget in February will probably include higher taxation, especially on the higher income groups, but will also include increases in social grants and further reduction in infrastructure investment.

Hopefully after the election, government may have the courage to do the right things, shelve BEE requirements, allow the private sector to provide services, resuscitate the police service, limit the growth of the public sector and public sector salaries, and spend that money on crucial infrastructure projects.