Lower estimated tax revenue of R22.3bn for 2024/25 has increased the consolidated budget deficit, in a restrained medium-term budget policy statement (MTBPS), which keeps SA on its fiscal consolidation path.
“The fiscal strategy remains on course,” finance minister Enoch Godongwana said in the MTBPS, tabled in parliament on Wednesday afternoon. While there has been a slight slippage in the fiscal metrics, the Treasury insists that it was “determined to maintain a prudent, disciplined approach to ensure sustainable public finances”.
Stabilising government debt remains the priority. Godongwana said in a media briefing prior to his speech in the National Assembly that the government of national unity (GNU) partners agreed on the policy of fiscal consolidation but differed on its pace, with deputy finance minister Ashor Sarupen — previously the deputy finance spokesperson for the DA — saying he was “comfortable” with the MTBPS.
Treasury director-general Duncan Pieterse said in an interview with Business Day that the fiscal framework was “credible”, and he believed ratings agencies would be likely to view the MTBPS as consistent with the 2024 budget and constructive over the medium term. He said there was the potential for some upside revenue surprises (including from two-pot withdrawals), fiscal risks had been accommodated, an initiative was planned to reduce the headcount, and growth assumptions were not “overly optimistic”.
Previous overestimates of economic growth had been reversed in favour of a more balanced forecast. “We are still sticking to our fiscal path and we are still going to achieve our targets,” Pieterse said.
Expenditure of R11bn over the next two years has been provided for a voluntary early-retirement package for public servants 55 years and older, in a bid to reduce the public sector wage bill (which consumed 32.1% of consolidated expenditure in 2023/24) and to rejuvenate the public service.
It is assumed that about 30,000 government employees will take the package: 12,000 in the first year and 18,000 in the second year. The Treasury hopes to save R2bn each year from the initiative. No indication was provided in the MTBPS as to the future of the social relief of distress (SRD) grant and its possible conversion into a basic income grant, but the Treasury did say that the future budget for social grants was sufficient for inflation-linked increases in 2025/26.
Gross tax revenue for 2024/25 is estimated to be R22.3bn lower than the 2024 budget forecast, resulting in a consolidated budget deficit of 5% compared to the budget’s 4.5% estimate. This is projected to fall to 4.3% in 2025/26 compared to the budget’s forecast of 3.7%, to 3.6% (3.3%) in 2026/27, and to reach 3.2% in 2027/28. Declining fuel levy and import VAT collections have contributed to the lower tax revenue, though corporate tax and domestic VAT collections are expected to exceed the 2024 budget projections.
Compared to the 2024 budget, gross revenue collection is projected to fall short by R41.4bn in 2025/26 and 2026/27, while main budget noninterest expenditure is expected to increase by a net R32.4bn over the next two years, compared to the 2024 budget. Lower tax revenue has also pushed up the gross debt to GDP forecast to 74.7% for 2024/25 from the budget’s 74.1% but it is still expected to peak at a slightly higher 75.5% (75.3%) in 2025/26 before declining to 75.3% (74.7%) in 2026/27 and to 75% in 2027/28.
This had required what the head of the budget office in the Treasury, Edgar Sishi, said was a “relatively restrictive” approach to government consumption to address the fiscal imbalance. However, he emphasised that that did not represent a “cash crunch” for the government. Despite the revenue shortfall, primary budget surpluses (when revenue exceeds noninterest expenditure) were still expected for 2024/25 and over the medium term.
In an interview with Business Day, Pieterse highlighted two deliberate changes in spending over the medium term, namely the increase in infrastructure spending and targeted additions to baselines, to deal with state capacity and institutional strengthening. The economic regulation and infrastructure budget will increase by an average annual growth of 10.9% between 2024/25 and 2027/28.
The Treasury has adopted a cautious approach to economic growth forecasts, reducing its 1.3% budget projection for 2024 to 1.1% in line with that of the Reserve Bank. Growth is projected at 1.7% in both 2025/26 and 2026/27, and 1.9% in 2027/28, translating to an average of 1.8% from 2025 to 2027, up from the 1.2% average of the previous three years.
However, the Treasury says “more positive signs are emerging” as the economy benefits from structural reform and a stable electricity supply. Gross fixed-capital formation is forecast to contract by 2.5% in 2024, mainly due to elevated operating costs, particularly in logistics and energy. The Treasury says faster growth will depend on the continued implementation of economic reforms.
The net R32.4bn increase in main budget noninterest expenditure over the next two years (R10.4bn in 2024/25) compared with the 2024 budget, includes the early retirement provision, repayment to Sanral for the Gauteng toll road and the deployment of SANDF troops in the Democratic Republic of Congo.
Consolidated government spending is expected to grow at an annual average rate of 4.9% over the next three years reaching R2.77-trillion in 2027/28, with allocations to infrastructure increasing strongly. Payments for capital assets are set to increase by an average of 10.6% per year to support economic growth and job creation.
Debt service costs will consume 21.6% of revenue and are estimated to cost R389bn in 2024/25 and R475.7bn in 2027/28. Gross loan debt is expected to increase from R5.62-trillion in 2024/25 to R6.82-trillion in 2027/28.
The Treasury said in the MTBPS that “government is considering ways to reform the grant system and consolidate public employment initiatives. This includes a review of the effect of the skills development funding system, where the levy collected averaged R20.9bn over the past three years. Proposals will be presented in the 2025 budget.”
The Treasury said a discussion document on fiscal anchor policy options would be released at the end of March. Proposals were also under consideration for legislative changes to ensure that debt sustainability would be embedded in the planning and budgeting processes of the government.
The Treasury noted in the MTBPS that debt redemptions would increase from R173.7bn in 2025/26 to R306bn in 2027/28 averaging R211.5bn over the medium term. To manage these redemptions, the government would exchange some shorter-dated bonds to longer dated bonds. Over the medium term, the government would raise about $15bn from international financial institutions and capital markets.
After beginning the day as much as 0.67% firmer at R17.53/$, the rand began to give back the gains in the minutes leading up to the speech, a move which accelerated while the minister spoke. By 2.28pm it had reversed course and was 0.49% weaker at R17.74/$.
By 6pm it had recovered to be flat at R17.67/$. Bonds firmed fractionally on the day with the yield on the benchmark R2030 falling 1 basis point to 9.25%. Bond yields move inversely to their prices.
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.