Nedbank, one of SA’s four largest banks, is the latest to add its voice to growing concerns about the state of the country’s public finances, highlighting how acute power shortages, inefficient logistics networks and a higher wage bill continue to hinder the country’s fiscal position.
Reserve Bank governor Lesetja Kganyago has repeatedly warned that the deteriorating fiscal position threatens macroeconomic stability, with the rand likely to come under pressure as SA’s risk premium worsens. The situation is captured in the latest budget numbers that show a rapid deterioration in the fiscal position as revenue falls due to unfavourable global conditions and the harsh domestic environment.
Nedbank’s latest economic research shows corporate tax collections dropped sharply in the first four months of the 2023/24 financial year, dragging down total tax revenue on income and profits, while subdued VAT growth contained revenue from goods and services.
Nedbank senior economist Isaac Matshego said total national revenue was down by 3.2% over the first four months of 2023/24 (April to July) compared with the same period in 2022/23, with the main drag coming from lower taxes on income and profits.
Over the period taxes on income and profits were down by 4% year on year, pulled lower primarily by a drop in company taxes, he said. But personal taxes surprised by holding up relatively well. They rose 7.5% compared with 7.6% in 2022/23.
“The first four months of 2023/24 recorded lower revenue and expenditure increases well ahead of budget. The rapid increase in expenditure against the backdrop of underlying poor economic conditions threatens to undermine the fiscal position in 2023/24 and beyond,” Matshego said.
“The myriad economic challenges are clearly hurting tax collections, pointing to the urgent need to contain fiscal spending to restrict the widening of the budget deficit and consequent increase in public debt and debt service costs.”
Power cuts
The higher levels of load-shedding from January to May disrupted operations and inflated input costs as companies relied on expensive generators, undermining profitability.
Logistics constraints, as well as moderating external demand with growth challenges in China and Europe, also bode ill for the export of critical commodities.
At the same time, public sector unions secured wage increases well above the budgeted figure, which placed overall expenditure under pressure. The increase in debt service costs raised total expenditure.
“Debt service costs are another key contributor to the sharp increase in aggregate expenditure. In the fiscal year to date, interest payments on debt have jumped by 19.3% to R98.2bn, raised by the higher debt stock and elevated interest rates,” Matshego said.
He said though debt service costs rose in line with the budget estimates, equalling 28.8% of the total annual debt service budget, the widening budget deficit will result in higher-than-budgeted interest payments, unless expenditure growth is restricted, during the fiscal year. “Lower revenue and high expenditure growth point to a much wider budget deficit than projected in the 2023 budget statement.”
The budget shortfall totalled R191.1bn, equivalent to 67.4% of the R283.7bn consolidated budget deficit estimated over the first four months of 2023/24.
Matshego said the latest trend points to the budget deficit exceeding the 4% of GDP projected in the 2023 budget.
The Treasury has overseen the escalation of domestic gross debt-to-GDP from 23.6% in the 2008/09 fiscal year to 71.1% by the end of 2022/23. It estimated in the February 2023 budget that the sovereign debt burden would escalate further to 73.6% by the close of the 2025/26 fiscal year — a projection that Futuregrowth analysts Rhandzo Mukansi and Yunus January believe to be overly optimistic.
“We foresee public debt rising towards 80% in the medium term if growth continues to falter. If the provisions and contingent liabilities of the state are added to its gross debt burden, the domestic debt-to-GDP ratio careers towards 100%.”
Mukansi said that despite the rapid build-up in sovereign debt, the economy has precious little to show for this in terms of historic, prevailing and potential economic growth rates. And herein lies the economic threat of financial repression.
“The domestic public sector has proven itself to be an inefficient allocator of capital — historically prioritising current expenditure at the expense of fixed capital investment,” he said.
January said that while the domestic gross debt-to-GDP ratio has grown threefold since 2008/09, economic growth outcomes and potential growth have counter-intuitively only moved lower. Moreover, the cost of debt has increased over this period, further crowding out growth-enhancing public expenditure.
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