Much has changed in politics and the markets since finance minister Enoch Godongwana delivered his last budget in February. Not nearly enough has changed in the real economy.
When the finance minister stands up to deliver the first budget of the new government of national unity (GNU) on Wednesday, he will need to provide some substance for the surge in sentiment that the election outcome has brought.
Budgets are always as much about the narrative as the numbers. Godongwana will need to tell a convincing story about SA’s growth outlook. And, crucially, he will need to tell a credible story about SA’s fiscal outlook. His particular task is to deliver numbers that demonstrate the government is on track to stabilise SA’s soaring public debt level and reduce its high debt costs. They need to be numbers the market can believe — and that a new and different government has endorsed, despite the tough trade-offs involved.
Things are looking far better than they were in February. The post-election turnaround in investor sentiment has seen the rand bounce and bond yields fall. That helps reduce the government’s interest bill and its debt stock, and makes it cheaper to borrow new money, all of which help put the debt on a better medium-term trajectory. But the trajectory was looking better anyway: the data suggests targets seen by the market in February as “stretch” targets are being achieved.
There is greater confidence that it can deliver on its promise to run primary surpluses that will stabilise the public debt at about 75% by 2025/26. Some economists believe it will outperform the February projections by some margin, with revenue coming in higher than expected and spending well under control. RMB Morgan Stanley said in a recent note that SA stood out as the fastest improving fiscal story across Morgan Stanley’s entire emerging market coverage universe.
For all that, SA is still struggling to regain the fiscal credibility it lost in all the years the Treasury kept missing its growth and budget targets. That continues to cost the country in terms of steep borrowing costs, particularly for longer-term debt, which crowds out private investment as well as public spending on development.
Modelling by Goldman Sachs finds the “fiscal credibility gap” has narrowed since 2022, as the government has started to deliver on its targets. But the market consensus on deficit and debt outcomes over the next couple of years is still worse than the Treasury’s estimates. Closing the fiscal credibility gap would cut another 100 basis points off the cost of 10-year government debt, Goldman Sachs estimates.
Godongwana’s task then is not only to show tangible, real economy good news to support the good news priced into the financial markets, but also to close the sizeable credibility gap that remains. He will no doubt tell us this is a budget that balances the need for higher and more inclusive growth with the need for more sustainable public finances. His GNU cabinet colleagues have to deliver the reforms to drive that growth, and they have lately been road-showing around the world to show investors that the new coalition partners are working as one and focused on boosting growth, jobs and investment.
The finance minister will have to take the growth narrative forward with a rosier picture of SA’s prospects given that reforms are gaining momentum and the new government seems more united on these than the last one. He will want to highlight the role played by Operation Vulindlela, which is as much a Treasury initiative as a presidency one. And he might well want to update the Treasury’s earlier numbers on the upside growth scenarios that could materialise.
Certainly, higher growth rates over the medium term would quickly solve SA’s public debt problem, which is at root because the country isn’t growing fast enough to support its spending needs. However, the Treasury, which upped its medium-term growth forecast to 1.6% in February, knows full well it cannot risk basing the budget numbers on overly-rosy growth forecasts, so it is a balance between narrative and numbers.
The minister’s narrative will have to provide clarity too on where the GNU stands on the public finances. In theory, the new partners may be committed to fiscal consolidation, but in practice new and energetic ministers from all sides will be wanting more money.
Whether there is agreement on tough and tangible decisions to reduce government spending is still unclear. So too is whether compromise can be reached on issues such as the new, legislated fiscal rule mooted in February. It’s no longer clear though how fast the government wants to push ahead with this, especially given that it is already meeting its targets on achieving a debt-stabilising primary budget surplus, a target that can itself serve as a fiscal rule.
But what of the numbers? Treasury data for the first five months of the fiscal year show revenue running a little behind February’s estimates, but this is expected to pick up in the rest of the year, not only because growth should improve but also thanks to the two-pot taxes, which could be as much as double the Treasury’s R5bn estimate.
The finance minister will have to take the growth narrative forward with a rosier picture of SA’s prospects given that reforms are gaining momentum and the new government seems more united on these than the last on.
Some economists expect revenue will again outperform. And spending appears to be on track, so the Treasury should at least meet its deficit and debt projections, though it would make sense not to change too much now. There will be more data to feed into the February 2025 budget.
However, the spending numbers for the medium term continue to raise questions. The debt stabilisation path relies on huge reductions to spending over the next three years, details of which the Treasury has yet to outline. That’s one reason the IMF’s projections are worse than the Treasury’s — without evidence of how spending will be cut, the fund doesn’t factor in the full extent of the planned consolidation, and unlike the Treasury it does not see SA’s public debt stabilising.
Many in the market now credit the Treasury with starting to build a track record on spending restraint, and the tight medium term spending path has recently gained credibility. Yet much is still missing. Not only is there little detail on the planned cuts that have been pencilled in, but there is no provision beyond 2026 for any funding for state-owned enterprises (and none at all for Transnet).
There’s no clarity on the public wage bill or social grants, or on how government will deal with the huge debt municipalities owe Eskom and the water boards. And of course not even a gesture to the contested National Health Insurance plan.
Godongwana’s challenge on Wednesday will be to walk the fine line between providing substance for a more positive narrative on SA, while injecting a note of reality into the numbers.
• Joffe is editor-at-large.
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