Minister faces tough Budget as fiscus teeters on edge of collapse
FINANCE Minister Enoch Godongwana does not quote renowned poets when tabling his Budget Speech in Parliament, nor does he bring an aloe vera plant to convince us of the resilience of the economy.
Instead, Godongwana prefers to dive straight into the crux of the matter and churn out the growth forecasts, tax revenue forecasts and expected government expenditure for the years ahead, without pretence at fattening the cow before slaughter.
Wednesday will be no different as Godongwana will climb onto the podium at the Cape Town City Hall and inform the country, without flattery, that the economy is not performing well.
With the energy crisis far from being resolved, dysfunctional municipalities and calamitous natural disasters, Godongwana’s Budget has to extend social spending on the back of dwindling tax revenues as a result of reduced productivity and declining business activity.
On Friday, Citadel chief economist Maarten Ackerman said Godongwana would need to consider his allocations carefully, putting money where it would make the largest impact in turning the economy around.
“We are faced with a zero-growth economy, since the South African Reserve Bank recently cut its estimate for 2023 economic growth to only 0.3%,” Ackerman said. “In this climate, it is vital to develop a budget that will create policy certainty by giving clear direction and outlining specific and attainable targets.”
The government has declared two national states of disaster in an effort to stimulate urgent responses for the energy crisis and the recent flooding of seven provinces.
In his State of the Nation Address, President Cyril Ramaphosa alluded to the need for a more permanent solution to respond to the needs of the most vulnerable.
However, the National Treasury has confirmed that a permanent extension or replacement would be possible only through a reduction in spending elsewhere or a permanent increase in revenue (or both) to ensure the stability of the public purse.
South Africa has benefited from a rallying commodity cycle as it translated into significantly higher tax collections, mainly driven by an increase in the contribution of mining to company income tax collection.
Since the June 2020 adjustment Budget, the government has seen a cumulative R500 billion revenue over-collection, when compared to the National Treasury’s expectation at the beginning of each fiscal year.
However, on Friday, Ninety One fixed income analyst Simamkele Kobus said the commodity tailwind was becoming a tail risk.
Kobus said the National Treasury would go back to revising revenue forecasts lower while the structurally high spending and dysfunction of state-owned entities (SOES) would start to challenge fiscal prudence as the commodity tide ebbed.
“The revenue tide is now turning. We believe that we will start seeing the National Treasury revise its revenue forecasts lower,” Kobus said.
“Commodity prices have reduced significantly since last year and volumes in the mining sector are still quite weak. This should be reflected in lower turnover and tax paid to Sars.
“The intensity of load shedding and its impact on GDP growth will also have a devastating impact on tax collection. The South African Reserve Bank has already revised its growth forecasts down by 90 basis points versus its expectation in November 2022 off the back of this load shedding. We also expect lower growth as a result.”
The country’s fiscus is teetering on the brink of collapse due to the weight of the government’s widening debt burden, public sector wage bill, failing SOES and the ever-expanding social spending.
In October, Godongwana said government debt was projected to be more than R4.7 trillion in the current financial year, incurring an average of R355bn in debt-service costs a year, which is R5.9bn higher than previously estimated a year ago.
Additionally, the broad consensus across financial markets is for the government to assume between R200 million and R250m of Eskom’s R397bn debt burden.
Even though this could be staggered across several years, the net impact would be a higher debt ratio and a higher debt-servicing ratio and lower contingent liabilities as a share of GDP.
Momentum Investments economist Sanisha Packirisamy said Godongwana needed to make tough fiscal decisions as insufficient energy supply posed the biggest downside risk to growth and investment in the economy.
“Reducing policy uncertainty and fast-tracking the implementation of structural reforms that have wide-reaching benefits to improve the country’s growth trajectory and job outlook require a broader political consensus on what is needed to fix SA’S ailing growth rate,” Packirisamy said.
“Aside from a progress update on Operation Vulindlela, the Treasury may announce funding that is required to fix financial inadequacies at other state entities, aside from Eskom. It may further elaborate on cost savings associated with rationalising government departments.”