South Africa’s weak economy has placed National Treasury in the unenviable position of having to control a budget under deteriorating fiscal metrics. In addition, although the finance minister has suggested a curtailment of certain expenditure, he will inevitably face fierce political resistance from parties who are looking to garner votes in next year’s general election. To provide insight as to how these forces are likely to play out in next month’s Medium-Term Budget Policy Statement, we commissioned Ninety One to pen a bespoke article for Dynasty clients.
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Since the 2022 Medium-Term Budget Policy Statement (MTBPS), it had become clear to us that National Treasury’s budgetary projections for revenues were too optimistic. Given that the commodity tailwind has all but disappeared, the revenue gains that we had enjoyed over the last few years are unlikely to materialise this year. Notwithstanding the stellar job that SARS has been doing to rebuild the institution and therefore increase efficiency in revenue collections, we believe National Treasury will report a negative hit to revenues in the coming MTBPS.
Revenue collection – slippage to be lower than expected
Earlier in the year we were concerned that the slippage in revenues would be larger – closer to R100 billion for this fiscal year alone. However, we now expect revenue slippage to be roughly half that – at R50 billion. This is largely because – with the exception of company income tax – other tax line items are performing at relatively acceptable levels. Personal income tax, for example, is running at an 8% growth rate year-to-date. Conversely, company income tax is currently running at close to 15% lower than last year. The overall result is a better-than-feared performance in revenues to date.
Figure 1: Evolution of revenues budgeted and outcome
Source: National Treasury & Ninety One
Economic growth – down but not out
When measured against expectations at the beginning of the year, the economy has also performed marginally better than feared. With bouts of stage 6 load shedding earlier this year – understandably a massive hit on economic growth – the economy was at best expected to be flat versus last year. Yet the economy has proven to be more resilient, with GDP for calendar year 2023 now expected to be 0.7% by the SARB.
Spending pressures mounting
The weakness in revenue collection has been coupled with expenditure slippages. In the February 2023 budget, Finance Minister Enoch Godongwana set expenditure for this current fiscal year at R2.035 trillion, only 1.5% higher than the previous year, with spending expected to grow by around 5.5% thereafter. Only a very small increase in wages was budgeted for, with the wage growth rate penciled in for the fiscal year 2023/24 at only 1.6%. National Treasury was adamant that they did not want to front-run the wage negotiation process and so penciled in lighter amounts. Of course, they knew this was a risk to their numbers even at the time, but believed it was the prudent thing to do.
The wage negotiation process concluded in April, resulting in a 7.5% increase in the baseline compensation number, and raising the total wage bill by R37.4 billion to R730 billion and surpassing the level that the finance minister only thought would be reached in 2025. The National Treasury may manage to reprioritise some spending, but it will be difficult to get enough from reprioritisation not only for this year but for the outer years as well.
Unfortunately, spending pressures extend beyond the wage bill. The SOEs continue to remain a concern for fiscal sustainability. Currently, there is an allocation of R30 billion in the budget for SOEs. This figure excludes the amount earmarked for Eskom, which is now below the “spending line”. It’s becoming increasingly evident that additional funding may be required. Furthermore, it is worth noting that the COVID grant was originally budgeted for only until the end of fiscal year 2023/24.
In conclusion, the finance minister is caught between a rock and a hard place. He needs to present a consolidation path amidst mounting pressures from both revenue weakness and mounting spending. The ministry, together with National Treasury, have been floating some ideas to the cabinet, which have been leaked to the media. These include combining some ministries and departments to save funds. Potential policy changes will however probably only be implemented at the Budget in 2024. The MTBPS in November is therefore likely to be limited to reflect a mark-to- market for the fiscal slippage and not provide a material policy response at this point in time.
By Sisamkele Kobus, Fixed Income Analyst, Ninety One
