Godongwana on a tightrope with risks on every side
In an election year, there is naturally concern about possible populist decisions that could worsen the country’s already fragile fiscal position. Both domestic and international investors expect a sharp deterioration in key fiscal metrics (budget deficit and government debt). But despite investor concerns of any possible fiscal policy changes, the 2024 budget is more likely to preserve the current administration’s record of avoiding new pre-election populist policies and expenditure.
This budget is more likely to underscore the significant pro-poor spending already in place and under way, including R252bn paid annually to 27-million social grant recipients, and the intended rollout of a National Health Insurance (NHI) scheme. An estimated 61% of South Africa’s noninterest fiscal spending is already allocated to the “social wage” (various forms of social support, beyond just social grants).
The Enoch Godongwana-led National Treasury is likely to remain committed to the fiscal consolidation agenda notwithstanding this year’s general election and the reprioritisation of spending required to counteract the material increase in government’s wage bill after last year’s higher-than-budgeted public sector wage increase. This fiscal consolidation commitment includes the stringent “tough love” approach to support for struggling state-owned enterprises (SOEs) such as Eskom and Transnet.
However, the year-to-date expenditure trends imply that there might be some overspending — relative to the projections in November’s medium-term budget policy statement (MTBPS) — on the back of which the budget deficit is likely to be moderately bigger than the MTBPS projections. We foresee a main budget deficit of about 5.1% of GDP for FY2023/24 vs the 4.7% MTBPS forecast.
However, we don’t expect new spending programmes to be introduced, and we interpret President Cyril Ramaphosa’s commitment in the state of the nation address to “extend” and “improve” the social relief of distress grant as a long-term ambition rather than an imminent target. We expect the emphasis rather to be on the tightening of government’s purse strings to rein in the cost of servicing debt, which absorbs R355bn a year (about R100bn more than the annual spending on social grants).
We expect Wednesday’s budget to mainly contribute to a more sustainable fiscal path via expenditure restraint. However, the Treasury, via Operation Vulindlela — the joint policy implementation unit within the Presidency
— also plays an instrumental role in the policy reform process to lift economic growth, which is ultimately essential to buoy the revenue trajectory required to avoid a government debt spiral.
Indeed, should the logistics and electricity constraints ease this year, as we expect, this may impel upside risk to both economic growth and revenue projections for the 2024/25 fiscal year.
This year’s revenues are on track to reach the MTBPS projections, notwithstanding the divergent trends across tax types. Company income tax remains weak, falling 14.2% year on year in the fiscal year to date, but personal income tax and VAT revenues are more resilient, up 8.3% and 6.1% year on year respectively. Government’s revenue projections for FY2024/25, however, include R15bn of additional tax revenue measures, which we expect will come from fiscal drag (not adjusting income tax thresholds for inflation). This will partly negate the relief we foresee for consumers from lower inflation and interest rates.
In a nutshell, though the budget deficit is likely to deepen less than economist polls imply, that still worsens an already fragile fiscal situation and further widens the twin budget and current account deficits. This budget may also initiate the gradual use of the gold and foreign exchange contingency reserve account (GFECRA) — the unrealised profits made on South Africa’s gold and foreign exchange reserves, largely from rand depreciation — which will reduce government’s borrowing requirement (though there are many possible permutations of how and when this will be used).
However, such a limited resource presents no silver bullet. Without the spending discipline and growth-lifting reforms that we assume are under way, employing the GFECRA would merely be delaying a fiscal cliff. It is equally important that the GFECRA be used pragmatically, and we expect it to be subject to rules to define both the quantum and purpose of use.
This budget is therefore likely to modestly outperform very negative expectations while the gradual use of the GFECRA windfall should, ultimately, support a lower government debt-GDP trajectory than investors currently foresee. A credible path to fiscal sustainability will alleviate a major concern for investors, which should lower the cost of capital and support the currency.
But, besides a hopefully pragmatic budget, investors will also be monitoring the outcome, and impact, of the elections later this year as well as progress with growth-supportive reforms that are intended to alleviate constraints to economic growth, such as the constant electricity shortfall and logistics bottlenecks.