Treasury has maintained its prudent stance of fiscal consolidation in the face of a revenue shortfall of R57bn this year and is projecting deep spending cuts of R213bn over the next four years, including 2023/24 .
The projected revenue shortfall over the next three years from 2023/24 is R178.1bn, Treasury acting head of tax and financial sector policy Chris Axelson said in an interview on Wednesday on the medium-term budget policy statement (MTBPS) tabled in parliament.
Lower economic growth has led to a sharp decline in corporate tax collections while VAT refunds have been higher than expected. As finance minister Enoch Godongwana said in his medium-term budget speech in the National Assembly, public finances are “significantly weaker”.
Tax increases of R15bn are forecast for the 2024/25 budget and additional non-tax revenue will be derived from the government’s sale of the remainder of the digital spectrum and of strategic fuel reserves this year, said Edgar Sishi, head of Treasury’s budget office.
Treasury says its fiscal strategy aims to narrow the budget deficit, stabilise debt and ensure fiscal sustainability through spending cuts, revenue measures and additional borrowing.
“Government remains on course to stabilise debt in 2025/26 but at a higher level than previously projected,” the MTBPS states.
Treasury has given the assurance that despite the spending cuts — details of departmental cuts will be provided in the 2024/25 budget — spending on the social wage is protected and the R350 social relief of distress (SRD) grant is extended for a further year in 2024/25 at a cost of R33.6bn.
There will be a nominal increase in the value of social grants. Beyond that a comprehensive review of the social grant system will be required. A provisional allocation for social protection of R35bn in 2025/26 has been set aside in the medium-term budget, which could be used for a possible further extension to the SRD grant.
Net main budget non-interest expenditure decreases by R3.7bn in the current year though spending reductions amount to R21.7bn, which are offset by projected underspending and drawdowns on the contingency reserve among other things. Spending has been revised down by R64bn in 2024/25 and R69bn in 2025/26.
Allocation for wage increases
A R68.2bn allocation over the 2024 medium-term expenditure framework has been made to cater for the 7.5% public sector wage increase in the education and health sectors. This year provincial departments of health and education will get an extra R17.6bn for that. A total of R111.4bn over the medium-term expenditure framework has been added to the budgets of labour intensive departments to implement the 2023 wage agreement.
Consolidated government spending is expected to grow by an annual average rate of 4.6% between 2023/24 (R2.3-trillion) and 2026/27 (R2.6-trillion), in line with Treasury’s projection of inflation as measured by the consumer priced index (CPI) over the period. Compared with the 2023/24 budget, main budget non-interest spending is lowered by a net R37.3bn in 2024/25 and by R47.7bn in 2025/26.
Baseline budgets for basic education, health, and police are projected to grow below CPI over the three years from 2024/25 while spending on community and economic development functions will grow by 4.5% and 6.2% respectively. The wage bill will, on average, continue to grow below CPI inflation.
Transfers to provinces and municipalities will be cut significantly, the MTBPS states.
Treasury stresses critical front-line services such as basic education, health, and police services will be protected from the spending cuts. There will however be a funding gap in social development allocations to provinces, which will affect core services and transfers to NGOs. No provision has been made to bail out state-owned enterprises including debt-ridden Transnet, despite its weak finances.
Read the minister's statement in full:
Rationalisation of government departments
A rationalisation of government departments, entities and programmes over the next three years is also planned in a bid to cut expenditure. Controls are being exercised over the filling of vacant posts in national and provincial departments, and the government is assessing further controls on personnel budgets including providing incentives for early retirement. The government will also be assessing the multitude of agencies, Godongwana said in a media briefing.
“Over the medium term the government will begin reconfiguring the state to improve efficiency. The 2024 budget will propose measures based on spending reviews and a joint team is preparing recommendations including closing or merging non-performing entities,” he said.
Economic growth this year has been revised downwards to 0.8% from the 0.9% forecast in the February budget and to 1% (previously 1.5%) in 2024, 1.6% (1.8%) in 2025 and 1.8% in 2026.
The consolidated budget deficit is expected to reach 4.9% in 2023/24, up from the 4% projected in February and to gradually decline to reach 3.6% in 2026/27. Government is on course to realise a primary budget surplus — when revenue exceeds non-interest spending — this year and expects that to grow over the medium term.
Gross loan debt as a share of GDP is forecast to rise from the 74.7% in 2023/24 and to stabilise at a higher 77.7% of GDP in 2025/26 compared with the 73.6% projected in the February budget. Over the next three years the government will borrow an average of R553.7bn a year. The gross borrowing requirement for 2023/24 has increased to R563.6bn from the R515.6bn forecast in the 2023 budget.
Debt servicing costs
Debt service costs continue to consume the lion’s share of government spending and are estimated to reach R385.9bn in 2024/25 and R455.9bn in 2026/27 when it will represent 22.1% of revenue.
Godongwana noted that, excluding debt service costs, funding for capital projects remained the fastest-growing item by economic classification, expanding by 10.4% over three years.
Treasury has provided for a contingency reserve of R27bn over the medium term to cushion the fiscal framework.
Treasury plans to significantly increase private sector funding of infrastructure with the 2024 budget providing details on a new mechanism through which private sector investors and multilateral institutions can co-invest with the government in such projects. Godongwana said an Infrastructure Finance and Implementation Support Agency would be established to facilitate that.
Sishi noted in an interview the expenditure ceiling has not been successful as an anchor for fiscal stability, and Treasury would announce a new anchor in the February 2024 budget.
The government has decided to convert its loan to Eskom from an interest-free loan to an interest-bearing one and to propose that Godongwana will have the right to reduce the loan if Eskom fails to meet its conditions.
Soon after the minister started his speech the rand began to firm. After being 0.46% weaker at R18.72/$ at 2pm, by 2.20pm it had reversed course to be 0.2% firmer at R18.60, after briefly touching as low as R18.56.
Local bonds were also a touch firmer, with the yield on the generic 10-year falling to 10.62%, after reaching as high as 10.75% earlier in the day.
“The positive response by the rand is perhaps a sign of approval pertaining to the suggested fiscal discipline and no news of further allocations to ailing state-owned companies (SOC),” said IG senior market analyst Shaun Murison.
“Overall, the SA government is facing a challenging financial situation and is taking steps to manage it responsibly. The focus on budget cuts and the absence of major SOC bailouts indicate a commitment to fiscal discipline. However, the impact of these measures on the country’s economy and its citizens remains uncertain.”
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