The R56.8bn shortfall in government revenue reported in the 2023 medium-term budget policy statement (MTBPS) came as no surprise to observers of the monthly tax returns. It represented a moderate miss in volatile circumstances — equivalent to 3.1% of the revenue expected in the February 2023 budget of R1.788-trillion.
That revenue is a very large number, equivalent to 25% of GDP. The real tax burden (taxes/GDP) isn’t expected to change over the next few years. Company tax, lower by R35.8bn, and net revenue from VAT, down R25.6bn, accounted for much of the shortfall. Weaker metal prices and huge investment in alternatives to Eskom power were largely responsible for both declines.
Personal income tax grew as expected by 7%, in line with some growth in real wages and salaries for those employed in the formal sector. The shortfall will be fully covered by raising additional loans of about R54bn.
The higher ratio of national government expenditure to GDP, currently 29.1%, is expected to decline to about 28% over the next three years, still leaving scope for a positive primary balance of 0.3% of GDP this year and 1% next year.
Raising revenue to exceed expenditure, net of borrowing expenses, is the first and necessary step to reducing the burden of national debt to GDP — now about 74%, though predicted to decline to about 71% of GDP in three years.
National government expenditure is forecast to increase by an average of 4.6% per annum over the next three years, including servicing our debt — currently more than 20% of all revenue — which will cost taxpayers about R400bn this year. That would represent a decline after inflation.
Fiscal sustainability doubts
The government is still practising fiscal conservatism despite persistently slow growth that weighs so heavily on revenue and inhibits expenditure. That raises persistent doubts about fiscal sustainability — the willingness of government to avoid money creation, which means a heavy reliance on central and private banks to fund expenditure over the long run.
That raises the risk of more inflation and is already well reflected in high borrowing costs. This risk has, incidentally, not trended higher in the run-up to the MTBPS.
Encouragingly, the debt and currency markets reacted positively to the statement itself. The rand strengthened to improve the outlook for inflation and long bond yields declined by about 15 basis points to help reduce debt service costs.
In reading the medium-term budget and listening to the minister one is struck by how deeply dissatisfied government is with its own performance. The statement is a catalogue of failure.
To quote: “SA has become more vulnerable to external shocks, which makes major reforms critical and unavoidable. At present, capital investment is too low; too many government activities are inefficient, overlapping and non-critical; and the economy does not generate sufficient revenue to service government debt over the long term. These are the key shortcomings that government proposes to address over the next three years.
“Over the medium term there are important opportunities for deeper reforms, The 2024 Budget Review will propose to scale down outdated and unproductive programmes and entities. A new mechanism will be created to crowd in financing from the private sector and international finance institutions for large infrastructure projects. And government will propose new fiscal anchors to ensure a sustainable long-term path for the public finances.”
Enter the private sector
The case for “reconfiguring government”, as it is put, is vigorously argued by the government itself. It will however need its own genuine champions, informed by events rather than stale ideology. Quite simply, it will have to put the private sector, and private-sector incentives, in control of most of the activities that are so badly performed by the state-owned entities and government departments generally.
It can be called private-public partnerships rather than privatisation, but the essential reforms required will be to incentivise operating managers on the bottom line and return on capital — as the private sector does — to thrive and survive. The upside is incalculable.
As far as funding a reformed public sector is concerned, the place to start would be to dispose of key underperforming assets on the best possible terms. Selling assets or leasing them over the long term would be equivalent methods for raising capital and reducing government debt.
The leases can be sold to funders (foreign and local), which would be keen to provide finance on favourable terms, given credible operators. The Transnet iron ore line from Sishen to Saldanha is an obvious candidate for sale or lease, and there will be many other such projects made far more valuable under different operating control.
For the mines to lease and operate their essential gateways to the market would add many billions of rand to their values and taxable incomes.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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