With just more than six weeks to go to the medium-term budget policy statement it’s clear finance minister Enoch Godongwana will report that the public finances are in far worse shape than he budgeted for in February. It’s not yet clear how much worse, or just how tough it is for Treasury director-general Duncan Pieterse and his team to craft the credible fiscal framework he has made a priority.
So what do we know at this stage, and what do we not know? First, on revenue we now have numbers for the first five months of the fiscal year to end-August. They show an increase in tax collections that’s running well behind the February budget’s 6% estimate, opening up a R22bn gap. Extrapolating that to the full year would mean a R53bn revenue shortfall — a huge turnabout from 2022’s R94bn overrun.
But things could get worse — or better — later in the year. The Treasury must puzzle out which way it will go, and try to come up with credible full-year forecasts in an unusually uncertain environment. At macro level, it depends on how overoptimistic the Treasury’s February growth and inflation forecasts will prove to have been. But it’s the micro questions — especially what happens to corporate taxes and VAT refunds — that are being most closely watched on a monthly basis.
The past two years of commodity boom times have been a dramatic reminder of how material SA’s mining sector is to its public finances, bailing out a fiscus that was in deep trouble on the eve of the Covid-19 pandemic. But corporate tax receipts have fallen back sharply as commodity prices have fallen from their peaks and Eskom and Transnet have eroded output.
Corporate tax receipts were down more than 20% in June, one of the big months for corporate payments. Talk is that mining taxes were down 50%. Now the question is not just what happens to mining profits but also how much the commodities cycle boosted other sectors along with mining — and how far they might still have to fall, especially given the weakness in the economy. Which is why corporate tax trends are being closely watched in September, a significant month for nonmining company payments.
Then there are the VAT refunds, which spiked in 2022 and were expected to stabilise this year, boosting revenue. Except they haven’t stabilised so far. That’s partly for a good reason, which is that refund claims rise when investment is increasing, as it currently is, particularly on renewable energy installations. But it might also be for some not-so-good reasons, such as load-shedding and inflation raising companies’ expenses. Either way, it’s not yet clear whether the refund trend will continue for the rest of the year. The problem is that high refund levels cut the net VAT take even if VAT itself rises.
Debt is an even bigger and scarier uncertainty. The Treasury has lately upped its issuance of shorter-term treasury bills , which have maturities of up to a year and are less costly than the longer-term bonds the government issues for maturities of up to 30 years. The T-bills have to be refinanced sooner, which is a risk, but in principle more short-term debt is not a big issue for SA. Indeed, some would encourage it — SA’s government debt has an average maturity that is one of the world’s longest, at 12 years, compared to an emerging market average of about seven years. And the government is paying significantly less for short-term money than it is for longer-term borrowing.
But that’s exactly the issue: the turn to shorter-term debt is in part because investors are running out of appetite, and capacity, to buy the government’s longer-term debt, with demand at the Treasury’s weekly bond auctions sliding. Investors who might be happy lending to the government for 12 months are becoming ever more concerned about their chances of getting their money back in 10 or 20 years. Also, importantly, with foreign investors fleeing, SA’s financial markets are starting to run out of capacity to absorb yet more government debt, except at ever higher prices.
What we don’t know is how much the government will have to issue. It needs to finance its deficit, which is clearly going to be higher than the budget estimated, not just because revenue is under but also because spending is over. It’s also committed to hand over R78bn to Eskom in 2023 as part of the debt restructuring package. And it has to redeem about R140bn of maturing debt in the coming year, unless it can roll it over.
Economists are still running the numbers, as the Treasury surely is. Krutham (formerly Intellidex) puts the government’s financing needs at R608bn this fiscal year, and a total R1.8-trillion over three years. Essentially, the government is borrowing R2bn every working day. Everyone tends to look at the debt-to-GDP ratio — which the IMF reckons will go beyond 80% without stabilising as the government had hoped in February. But in absolute terms the borrowing is a large number, one that is consuming such a huge chunk of SA’s savings that it’s crowding out private sector investment. And the cost of servicing that debt is consuming ever more of the tax revenue the government is collecting, with the IMF estimating it will be more than twice the health budget within five years.
How seriously Godongwana’s cabinet colleagues are taking the debt spiral threat, and whether they are willing to take any tough decisions in an election year, is what we don’t know going into the November 1 budget. Closing the gap, and financing unbudgeted items such as an extension of the R350 a month social grant, requires reviewing whole multibillion-rand programmes, not just tweaking a hundred million here or there. Is the government about to consider letting failed state-owned entities such as the Post Office or Transnet go, or go private, instead of bailing them out? Is it about to take another look at Jacob Zuma’s #FeesMustFall bonanza, which now costs the state almost R50bn a year in student grants? Is it about to take a long hard look at the pay structure in the public service?
What we do know, from a recent sobering academic study, is that more government spending isn’t going to give SA more economic growth. That’s the case not just for government consumption spending on wages or grants, but even more for the investment spending that everyone wants the government to do more of. As it turns out, the fiscal multiplier for government consumption spending is 0.155 — so each R1 extra spending generates just 15c more economic output.
However, for investment spending the multiplier is a negative 0.118 — so the more of it the government does, the less output we get. Hardly an election winner, one would think. Godongwana and the team have a challenging six weeks ahead of them.
• Joffe is editor-at-large.
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