The National Treasury slashed its economic growth projections for 2023 to the lowest level since 2020 when pandemic-induced lockdowns hindered production and caused severe disruptions to global supply chains, the Budget Review shows.
Presenting his budget speech in parliament on Wednesday, finance minister Enoch Godongwana said Treasury cut its 2023 growth projections to 0.9% but increased its 2022 growth projections to 2.5% from October’s medium-term budget policy statement’s 1.9% estimates.
For the medium-term, 2023 to 2025, the Treasury cut its projections from 1.6% in October to 1.4%, he said.
“The upward revision [from 1.9% to 2.5%] reflects the better-than-expected third-quarter GDP of 1.6% supported by a strong commodity cycle,” Godongwana said. “But growth is expected to decline in 2023 and over the medium term [2023 to 2025] as a result of persistent power cuts, deteriorating rail and port infrastructure and a weaker global outlook.”
At 0.9%, Treasury’s GDP numbers are more optimistic than the SA Reserve Bank’s whose growth estimate for 2023 is at a low 0.3% from 1.1% previously.
However, they are closer to the 1% GDP forecast by economists surveyed by Reuters in February.
Low or no economic growth is a major fiscal risk and leads to lower tax revenues and simultaneous requests for fiscal support. Rising borrowing costs due to inflation and higher interest rates are also major risks to the fiscal outlook.
The Treasury estimates inflation will ease to 5.3% in 2023.
Electricity prices have been revised up by 4.6% over the medium term (2023 to 2025) compared with the 2022 MTBPS (Medium Term Budget Policy Statement) and are projected to average 14% in that period, following the regulator’s approval of an 18.7% tariff increase for Eskom in 2023/2024.
Headline inflation is expected to ease to 4.9% in 2024 and 4.7% in 2025 as core inflation moderates over the medium term.
But risks to the domestic growth outlook remain.
Unemployment remains high. After losing 2.3-million jobs to the pandemic, the economy has regained 1.6-million jobs, but there were 655,000 fewer people employed in the third quarter of 2022 than in the fourth quarter of 2019.
Treasury expects gross fixed-capital formation to have grown 4.2% in 2022, mainly driven by private investment in machinery and equipment, but to slow to 1.3% in 2023 as weaker global demand and tighter global financial conditions constrain foreign investment.
“The electricity crisis will weigh on investment decisions and reduce profitability through lost production and increased operating costs and delays in the rollout of infrastructure through the independent power producer programmes will support investment later than anticipated at the time of 2022 MTBPS,” Godongwana said.
“Firms remain under strain given challenging domestic business conditions.”
But it is not all bad news.
In a media briefing, Godongwana said government is taking urgent measures to reduce load-shedding in the short term and transform the sector through market reforms to achieve long-term energy security.
He said other reforms are under way to improve performance in the transport sector, in particular freight rail.
“The economic reform agenda is making progress,” he said. “Over the last year, additional steps have been taken to liberalise the electricity sector and encourage private investment. Power generation regulations have been relaxed, with businesses and municipalities given greater freedom to generate power and implement greener solutions.”
Treasury acting director-general Ismail Momoniat said Transnet is also taking steps to improve operations in key corridors.
Economic growth revisions have also impacted fiscal ratios.
Godongwana said the fiscal consolidation strategy adopted several years ago has restrained growth and allowed Treasury to use part of the revenues to reduce the deficit.
“As a result, we are bringing the fiscal deficit down without resorting to tax increases or further cuts in the social wage and infrastructure.”
He said a primary fiscal surplus will be achieved in the current financial year, and this will be maintained over the medium term.
“This is a critical policy stance,” Godongwana said.
The Budget Review shows that the consolidated budget deficit will decline from 4.6% of GDP in 2021/2022 to 4.2% of GDP in 2022/2023, reaching 3.2% of GDP in 2025/2026.
These figures include the impact of the partial take-over of Eskom debt, Godongwana said.
However, government debt remains high.
Treasury said the gross debt stock is projected to increase from R4.73-trillion in 2022/2023 to R5.84-trillion in 2025/2026.
Debt-service costs are projected to average R366.8bn annually over the medium term, reaching R397.1bn in 2025/2026.
“These are resources that could otherwise be used to address pressing social needs or to invest in our future,” Godongwana said.
He added that risks to the fiscal outlook include a worsening of the economic outlook, a further weakening of the finances of state-owned companies, and an unaffordable public-service wage agreement.
“If these risks materialise, they will require us to make difficult budgeting trade-offs. For these reasons, we must continue exercising fiscal restraint,” he said.
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