Finance minister Enoch Godongwana presents the 2023 medium-term budget policy statement (MTBPS) on Wednesday against a backdrop of low economic growth, high government debt and insufficient taxes.
Other issues include the country’s energy and transport crises, high unemployment, the public sector wage bill, rising inflation, the effect of geopolitical events and SA’s coming general election.
Nedbank expects real GDP growth of 0.6% in 2023 and 1.1% in 2024, slightly lower than the Treasury’s February forecast of 0.9% and 1.5%, respectively.
Nedbank senior economist Isaac Matshego said they expect the Treasury to revise its growth forecasts slightly lower.
Falling tax take
SA Revenue Service (Sars) data shows total revenue for the five months to August fell 0.7% year on year, underpinned by substantial declines in corporate taxes of 13.7%, but personal income taxes were up 8% and VAT 5%.
Momentum Investments economists said gross tax revenues are running behind schedule, owing largely to underperformance in corporate income tax (CIT) collections.
“Though the mining sector acted as a large contributor to CIT in FY2021/22 according to the Sars tax statistics report for 2022, a slump in SA’s key exported commodity prices is likely to drive this contribution lower in FY2022/23, closer to the longer-term average of around 10%,” they said in a note.
Nedbank expects tax collections to fall short of the February 2023 budget estimates by about R47bn in 2023/24 and R156bn over the medium-term expenditure framework (MTEF) period (2023/24 to 2025/26).
“As a result, we forecast revenue growth for 2023/24 at a low 1% vs 3.5% in the budget 2023,” said Matshego.
Rising expenditure
Absa senior economist Miyelani Maluleke said total expenditure was up 9.1% year on year compared with the Treasury’s target of only 1.5% growth.
Nedbank forecasts aggregate expenditure growth of 6% in 2023/24, overshooting the 3.4% projected in the 2023 budget, due mainly to a higher-than-budgeted public sector wage bill.
After a deadlock with labour unions, a 7.5% pay increase settlement agreement was reached for financial year 2023/24, while the 2024/25 increase has been set at a minimum of 4.5% and a maximum of 6.5%, “we assume” 5.5% in 2024/25, said Matshego.
“These increases push the wage bill higher by a combined R59bn compared to the budget 2023 figures.”
Matshego said that in the medium term the government would have to limit new hires and cap wage growth to achieve fiscal consolidation.
The wage bill remains among the largest expenditure items, absorbing an annual average of 37.2% of fiscal revenue over the MTEF period.
Maluleke said the Treasury had pencilled in no pay increase in the 2023 budget, arguing that it did not want to pre-empt the outcome of the wage talks.
“We estimate that the wage deal will cost the government an additional R23bn in 2023/24,” he said.
“With wage adjustments carrying over to future fiscal years, we estimate that the public sector wage bill will be R52bn larger by 2025/26 than the Treasury’s baseline from February, assuming no offsetting measures.”
Social transfers
Momentum Investments economists said that any announcement on the potential extension of the Social Relief of Distress (SRD) grant could be delayed to the February budget and may not reflect in projected government expenditures laid out in the MTBPS.
BNP Paribas estimates that the SRD grant of R350 a month paid to about 8-million recipients amounts to R36bn. It also said the government’s expected downward shift in the total number of social grant recipients in FY2024/25 looks unrealistic, given the sociopolitical difficulties associated with rescinding grants from a number of individuals who earn less than R624 per month.
According to the Treasury, after excluding the SRD grant, social grant coverage is expected to increase from about 18.6-million beneficiaries in March 2023 to 19.6-million beneficiaries by March 2026.
SOE bailouts
According to Momentum Investments, the support to state-owned enterprises (SOEs), which has grown sharply since 2017/18 to 1.5% of GDP in 2023/24, is likely to remain a drag on the fiscus in coming years, given the weak financial state of many state entities including Transnet, Denel and SA National Roads Agency.
Transnet has requested the government to take over a portion of its debt of about R130bn.
Economists expect the state entity to get some assistance, albeit with strict conditions in the medium term.
It is expected that Eskom will not get further assistance in the medium term after receiving significant debt relief of R254bn.
Budget deficit
The fall in revenue collections and the higher-than-budgeted expenditure will widen the deficit to 5.5% of GDP in 2023/24, worse than the National Treasury’s projection of 4% in the budget, said Nedbank.
“We expect the deficit to exceed February’s forecasts in 2024/25 and 2025/26, at 5.4% and 5% against the National Treasury’s 3.8% and 3.2%, respectively,” said Matshego.
Absa expects a main budget deficit of 6.6% of GDP (or R461bn) in 2023/24.
Maluleke said Absa’s approach includes Eskom’s debt relief deal above the line since this entails a transfer of fiscal resources.
“Using the Treasury’s approach of accounting for Eskom debt relief below the line, our forecasts imply a main budget deficit of 5.5% of GDP in 2023/24 relative to the NT’s [National Treasury’s] target of 3.9%. Against this, we expect debt to GDP to rise to 75.2% in 2023/24 from 70.6% in 2022/23.”
Citadel chief economist Maarten Ackerman said the implications of how the government is able to balance the budget by borrowing more than R2bn a day, which is an unsustainable situation that is leading SA into a debt trap.
North-West University professor Raymond Parsons said a long-range fiscal plan is now needed to steadily wind down spending and debt and bring it under control in a way that establishes clear priorities for the future.
“Fiscal policy will inevitably have to be pragmatic and realistic to deliver sensible trade-offs to project a credible medium-term budget that offers more predictability and certainty,” he said.
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