It was a budget that sought to balance it all: avoiding a fiscal crisis, as the finance minister put it, while protecting the vulnerable and strengthening economic growth. And it somehow managed to make the numbers look better than almost anyone had expected. But it bounced so many key decisions to February and beyond that it was hard to take a clear view on its chances of success.
It was the kind of holding operation that is probably inevitable ahead of an election year, in which the big decisions tend to be pushed out to the new administration. This election will be more tense than most. But it doesn’t make it any easier to assess how and whether the big numbers in the budget will materialise — even though, as finance minister Enoch Godongwana says, the numbers are there, with nothing hidden.
Going into Wednesday’s medium-term budget most economists expected the National Treasury to show annual deficits of more than 5% over the next three years, with tax collections falling short and the pressure to spend rising. Even if the public debt ratio might still stabilise, this was expected to be later and higher than the Treasury projected in February — the IMF was talking debt ratios of 80% of GDP and higher.
Yet the Treasury managed to show deficits that were significantly higher than February’s rather buoyant estimates but avoided that scary 5%. The debt ratio is still expected to stabilise in 2025/2026, though at 77.7% it’s a lot higher than February’s 73%.
All this despite revenue numbers that were worse than many had expected, mainly because mining taxes are sharply down and VAT refunds sharply up. Tax collections are expected to come in R58bn short in the current fiscal year — though this is offset in part by a couple of windfall receipts, with R5.9bn coming in from 2022’s spectrum auction and R6bn from that year’s sale of strategic fuel stockpiles. The shortfall number for the three years of the medium term is even larger, at R178bn.
Nor is there scope for significant tax hikes to close the gap — the Treasury pencilled in just R15bn of tax measures, details of which await the more tax-oriented February budget. Instead, the strategy to close the gap between revenue and spending and stabilise the debt relies on enormous planned cuts to spending. These amount to R155bn over the medium term, starting with R21bn in the current year. Over a four-year period the plan is to cut more than R200bn. The quantum is close to the three percentage points of GDP the IMF said SA needed to implement.
Where it will come from will, again, be detailed only in February’s budget. But Treasury officials made it clear that these would not be across-the-board cuts: programmes and projects will be targeted, priorities will be set, service delivery and the social wage will be protected. Not only that, but there’s a bigger plan afoot to “reconfigure” government to make it more efficient.
President Cyril Ramaphosa announced that in his state of the nation address in February. A joint team is working on recommendations and the president will announce details in his address in February 2024.
The cuts are offset to some extent by substantial extra spending. That includes money for “personnel heavy departments to cover the higher-than-expected increases agreed to in the two-year wage settlement government agreed with public sector unions. It includes an extension of the Social Relief of Distress grant — though any further extensions are subject to a far-reaching review of the whole social protection system, which would look not just at all the social grants but also at labour market-type programmes to support poor households.
But even with the extra spending the budget framework presented on Wednesday still relies on a net R85bn spending reduction over the medium term to get the fiscal consolidation Godongwana had promised and stay the proverbial course on prudent public finances.
Will that happen? We await February’s budget to see details of the spending cuts, and of the tax hikes. February is also when we will hear more of the new fiscal anchor the Treasury is working on, to replace the ineffectual, decade-old expenditure ceiling. And we have to wait until February to hear from Ramaphosa what reconfiguring government will mean in practice (and whether it will in fact save any money given that retrenchments don’t seem to be on the cards).
Perhaps February will also bring clarity on whether there’s to be a bailout of Transnet — or indeed any other state-owned enterprises. Godongwana indicated his door isn’t really open to Transnet’s bailout request, at least until Transnet takes the private participation in government’s road map for the sector properly on board in its turnaround plan. Only then will it be clear how much of a bailout Transnet needs, and even whether it needs one, in Godongwana’s view.
The minister’s clear message on bailouts was one of the crucial messages coming out of the budget, as were the measures he has put in place to penalise Eskom and Denel for not meeting the conditions of their bailouts. Yet the longer term trajectory for SA’s public enterprises is still not clear, despite various reviews by the government, and without clarity it’s not clear whether they will continue to be the huge drain on the public purse they have been up to now.
Assessing the outlook for the public finances also depends on what happens to public sector wages beyond the two years of the current settlement — again a review of the structure of the public sector has been promised. It depends on what that review of the social grants system concludes and also on how that reconfiguration of the state plays out.
One thing that is clear though is that unless SA can lift its economic growth rate to a higher level, and sustain that, fiscal consolidation will have to rely on an endless round of spending reductions. Even if it stops climbing, a public debt ratio of 77% is extremely high. In absolute terms the debt is heading to more than R6-trillion. It is already costing R1 of every R5 government collects in taxes, the minister pointed out, and that is crowding out service delivery and economic growth.
Fixing the public finances would itself help to support higher rates of economic growth, freeing up capital in the economy for private sector productive investment and job creation, as well as improving investor confidence and lowering the cost of borrowing all round. Beyond that, the finance minister can only try to persuade his cabinet colleagues to step on it with reforms — inside and outside government.
Meanwhile, it seems too soon to judge whether this week’s budget will ultimately prove credible.
• Joffe is editor-at-large.
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