The MTBPS is important because it will provide a clearer picture of government’s commitment to fiscal consolidation and potential for economic growth.
Economists will be listening on Wednesday what finance minister Enoch Godongwana says about the country’s escalating debt, bailouts for state-owned entities (SOEs) and tax reforms when he delivers the Medium-Term Budget Policy Statement (MTBPS).
Investec’s economists warns that the country’s anaemic economic growth increases the disparity between government revenue and spending, raising concerns ahead of the MTBPS.
“Godongwana faces an uphill battle with mounting municipal debt and escalating crises in energy and logistics.
“As we await his speech, there is intense speculation on the course he might adopt. And make no mistake: he has little room to manoeuvre. The financial tightrope that South Africa is currently walking has three potential solutions: increasing revenue through taxes, cutting back on expenditure, or escalating borrowing,” Annabel Bishop, chief economist at Investec said.
She does not think there will be substantial cuts to government spending considering the country’s political landscape with an upcoming election next year and rather be more inclined towards consolidating administrative costs, with a potential focus on the amalgamation of various departments.
Tertia Jacobs, treasury economist at Investec, says tax increases, specifically capital gains, were discussed for some time and one possible approach could be a non-adjustment for higher inflation, which could generate an additional R20 to 30 billion in revenue. However, this could have ramifications pushing many people into higher tax brackets.
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Budget deficit pressing concern in MTBPS
Bishop and Jacobs say the budget deficit is definitely another pressing concern. Current projections suggest it may escalate to about 5% of the gross domestic product (GDP), with national debt potentially skyrocketing to over 72% of GDP and some experts even suggesting it could approach 80%.
Jacobs believes that the budget deficit’s rise can be attributed to weaker growth and plummeting commodity prices which are severely affecting corporate income taxes.
“However, the silver lining could be a rejuvenated economy, provided the energy sector stabilises and sees an influx of capacity. A boost in consumer spending could also be on the horizon if interest rates moderate in the upcoming year.”
She warns, however, that SOEs like Eskom and Transnet continue to drain government’s resources. The ideal scenario, says Bishop, is for these SOEs to be self-reliant, negating the need for consistent bailouts.
A concerning element of South Africa’s economic landscape remains the oscillation of commodity prices. Jacobs says the boom in 2021 and 2022 when escalating commodity prices, coupled with the Covid crisis and Europe’s energy predicament, worked in the nation’s favour, but recent declines exacerbated by the logistics crisis have put pressure on mining companies.
“A critical expenditure aspect government must tackle head-on is social grants. With around 9 million people relying on these grants, the cost is astronomical, especially with the potential increase of the Social Relief of Distress Grant, which might necessitate further tax hikes.”
Bishop and Jacobs say with this MTBPS South Africa stands at a crossroads. While the path forward is uncertain, what remains clear is that the country’s economic strategy needs an overhaul.
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MTBPS critical for business confidence
Busi Mavuso, CEO of Business Leadership SA, says in her weekly newsletter Godongwana will have to match the performance of the Springboks on the weekend.
“The MTBPS is critical for business confidence. I hope we will see a clear commitment to fiscal discipline, spending decisions that support growth and backing for the structural reforms we need to get the economy growing.”
Although Godongwana is faced with tax collection shortfalls because companies have not been profitable enough, mining royalties have slumped and overall economic growth has been weak, Mavuso expects him to hold the line, while also maintaining balance between spending and investing.
“Consumption expenditure does not grow the economy. We must see investment, particularly in the infrastructure needed to drive economic growth. The minister has signalled that some infrastructure spending will be delayed as the government seeks to shore up cash to manage its way through the shortfall. The fiscal discipline that implies is good for business confidence although infrastructure is key to resolving constraints on the economy.”
Mavuso emphasises that the MTBPS is an opportunity to build confidence on several fronts.
“It can demonstrate fiscal discipline by reining in spending and limiting tax increases or greater debt issuance. It can show that the budget decisions are driven by growth considerations, spending on upskilling and improving the public sector, while also supporting investment.”
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Underperforming fiscal revenue and fiscal framework
The Bureau for Economic Research (BER) says markets will be keen to know how National Treasury intends to deal with underperforming fiscal revenue and what that means for the broader fiscal framework.
Monthly data from National Treasury for April to August 2023 showed that gross tax revenue increased by just 2.5% year-on-year compared to the 5.6% increase announced in the February budget for the entire 2023/24 fiscal year).
The BER says extrapolating the year-to-date figure for the full fiscal year implies a tax revenue shortfall of R53 billion relative to budget expectations.
“The minister should also provide more detail on important non-wage budget cuts for 2023/24. From April to August main budget expenditure rose by 9.1% year-on-year, well above the growth of 1.5% for the entire 2023/2023 fiscal year.”
Therefore, the BER warns that if the current expenditure overrun is maintained for the rest of the fiscal year, government expenditure will be R152 billion higher than assumed in the February budget. “Combined, the revenue underperformance and the expenditure overrun would result in a budget gap of about 3% of nominal GDP and would push the main budget deficit close to 7% of GDP.”
At this stage, the BER expects a smaller gap (closer to 2% of GDP above budget).
“Finally, we will be on the lookout for any new expenditure items, such as new funds to Transnet or indications of an extension to the SRD grant beyond March 2024.”