With just two days to go to Wednesday’s national budget, market views have diverged on whether tax collections will undershoot or overshoot October’s budget estimates — but with government spending running well under budget for the year, the deficit is expected to come in about on target.
Economists warn, however, that concerns about the Donald Trump administration’s aggressive approach to SA could fuel risk perceptions and drive up long-term borrowing costs, reversing the gains government bond yields have made thanks to the GNU confidence boost.
Finance minister Enoch Godongwana said in October’s medium-term budget that revenue for the current fiscal year was expected to come in R22bn below last February’s budget estimates. This was because of a weaker-than-expected fuel levy and import VAT collections. Ironically, the suspension of load-shedding was a big factor, reducing diesel use and energy-related imports.
But the economy’s shock decline in the third quarter and disappointing monthly data from the Treasury have recently prompted some to revise the numbers down even further.
PWC tax director Kyle Mandy now expects the outcome will end up R10bn lower than October’s estimate, while RMB Morgan Stanley’s Andrea Masia wrote in a note to clients it could be a R13bn miss, partly because of nontax receipts that had been budgeted for but may not materialise.
Goldman Sachs’ Andrew Matheny, who has been much more bullish than the Treasury on the outlook, said in a note last week that recent data implied a shortfall of R2bn-R9bn, or up to 0.1 percentage points of GDP for the full year, though he still expects outperformance over the medium term.
But with the SA Revenue Service (Sars) due to close the books only at the end of the fiscal year on March 31, some still expect that lower interest rates and a pickup in growth, as well as the windfall from two-pot savings withdrawals, could boost collections. Sars commissioner Edward Kieswetter disclosed earlier this month the tax authority had already collected R11bn-R12bn in personal income tax from two-pot savings redemptions by end-January.
Absa economist Miyelani Maluleke and his team said in a note last week that with two more fiscal months to go this was already more than twice Treasury’s R5bn assumption.
“As consumption spending improves, domestic VAT collections should also have a relatively strong end to the fiscal year,” said Maluleke, who expects revenue to come in R11bn higher than October’s medium-term budget estimate.
Even those who think revenue is set to overshoot, caution that the Treasury may not show it in this week’s budget. And with spending undershooting in the year to date, the budget deficit for the current year may not change by much — though there is much concern about possible impact of new spending pressures over the medium term.
These include a higher-than-expected public sector pay settlement and pressure to up spending on the social relief of distress grant, as well as to plug the gap left by the withdrawal of the US President’s Emergency Plan for Aids Relief funding, provide funds for Transnet (and possibly more for Eskom), and spend more on defence.
December’s monthly Treasury data shows government spending was up just 3.1% against the Treasury’s full-year target of 5.2%, helped by lower than expected debt costs but also by about R9bn of government underspending all round — which may partly reverse as departments rush to use their money before year-end.
Absa expects a main budget deficit of 4.4% of GDP for 2024/25 against the Treasury’s October target of 4.7%, narrowing to 2.9% by 2027/28 assuming the Treasury holds the line on spending. Matheny expects the deficit could slip in the near term, but deficit and debt trajectories will be about unchanged, with debt stabilising at about 75% in 2025/26 as the Treasury projected.
Others including the IMF have been more pessimistic, projecting the debt ratio will keep rising, to about 80%.
RMB Morgan Stanley has built larger compensation of employees, transfers and subsidies for health and defence, and balance sheet support for Transnet into its baseline and with large debt redemptions and an additional year of Eskom support it sees government’s gross funding requirement rising from 5.8% of GDP this year to 6.9% in 2025/26.
Though demand for government bonds has been strong, Masia cautioned that “rising tensions between the US and SA could reduce investor confidence in SA assets, lifting the back end of the yield curve as investors ascribe [a] greater risk premium”.
“Pretoria’s fraught relationship with Washington, in the context of SA’s weak economic outlook and precarious fiscus, means that domestic assets are especially vulnerable to fluctuations owing to policy actions or misinterpretations thereof,” Oxford Economics Africa said in a note. It forecasts government debt will breach 80% of GDP by mid-2026.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.