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Arthur Kamp

Investment Economist at Sanlam Investments

Analysts have in the main welcomed the good intent reflected in Finance Minister Enoch Godongwana’s second Budget Speech this week. By announcing R13 billion of tax relief measures in 2023/24, Treasury has certainly sought to alleviate some pressures on society. The question now is whether it can deliver on its projected fiscal path. Despite Treasury’s intentions, South Africa’s fiscal challenges remain daunting.

Although Treasury has lifted the expected government debt trajectory, it continues to map a path to fiscal sustainability and a lower government debt ratio in the long term, despite elevated spending demands and ailing state-owned companies requiring support from the central government. That said, key assumptions relating to both revenue and expenditure, which help to yield this result, are bound to be tested.

The gross loan debt ratio increases from 71.1% of gross domestic product (GDP) at the end of the 2022/23 fiscal year to a peak of 73.6% of GDP in 2025/26, before declining to 65.9% of GDP by 2030/31. The near-term increase in the debt ratio mostly reflects Eskom debt relief amounting to R254 billion, while debt stabilisation is achieved through a projected improvement in the Main Budget primary balance (revenue less non-interest spending) from a surplus of 0.1% of GDP in 2022/23 to a surplus of 1.7% of GDP by 2025/26.

The updated estimate for the primary budget balance in 2022/23 is close to the projection published by Treasury in the October 2022 Medium-Term Budget Policy Statement, which reflected an improvement from -0.2% of GDP in 2022/23 to +1.5% of GDP in 2025/26.

However, in addition to severe expenditure restraint, the updated projections rely on a sustained high level of tax to GDP, which remains at its 2022/23 level of 25.5% of GDP over the medium term, despite weaker terms of trade and a weakening economy.

Near-term fiscal risks are limited, given Treasury’s sustained commitment to:

  • Pursuing debt sustainability
  • Improving tax administration
  • Constraining expenditure increases by reprioritising where possible.

We also know that South Africa has the advantages associated with:

  • A low level of central government foreign currency debt (11.2% of total government debt in 2023/24)
  • The long maturity structure of government debt (the weighted term to maturity of fixed-rate bonds and Treasury bills is 10.6 years in 2023/24)
  • Deep, liquid domestic capital markets.

Moreover, although the national government’s gross borrowing requirement remains large at more than R500 billion per year (around 7% of GDP) over the next three years to 2025/26, the government is expected to run down its cash balances by a cumulative R142.7 billion over this period to finance a portion of the borrowing requirement, while gross issuance of domestic long-term loans increases to R330 billion in 2023/24 from R311 billion in 2022/23.


However, fiscal risk remains significant. The improving government budget balance does not include the impact of providing debt relief to Eskom. This debt relief is reflected in advances of R78 billion in 2023/24, R66 billion in 2024/25 and R40 billion in 2025/26, providing conditions are met. These advances represent Eskom’s full debt servicing requirement over the period. This will be funded through the R66 billion previously included in the medium-term expenditure framework, plus R118 billion in additional borrowing.

Over and above this, Treasury will take over R70 billion of Eskom’s loan portfolio in 2025/26. Although these additional advances are not reflected in the budget deficit, they must be funded and therefore increase the central government’s debt level.

The planned debt relief should help stabilise the ailing state-owned company, while reducing government guarantees for Eskom debt. Even so, viewed differently, fiscal consolidation that is not accompanied by an improvement in the state’s balance sheet leaves the intended improvement in the government’s financial position vulnerable to the realisation of contingent liabilities.

Importantly, too, the government’s debt service cost is expected to absorb 19.8% of Main Budget revenue by 2025/26, up from 18% of revenue in 2022/23, implying that debt service costs amount to a cumulative R1.1 trillion over the medium-term expenditure framework period. This illustrates not only South Africa’s negative debt dynamics as debt is issued at high real interest rates relative to real GDP growth, but also the extent to which debt servicing costs detract from the government’s ability to spend more on the social wage.

Nonetheless, Treasury has sought to alleviate some pressures on society by announcing R13 billion of tax relief measures in 2023/24 to support the transition to clean energy, assist in increasing electricity supply and to limit the impact of high fuel prices. As such, the budget includes proposed tax relief of R4 billion to individuals that install solar panels, as well as R5 billion to companies through expansion of the renewable energy tax incentive. Leaving the general fuel levy unchanged ‘costs’ the fiscus R4 billion.


The question now is whether National Treasury can deliver on its projected fiscal path. Despite the right intent, the government’s track record in delivering has fallen short. In February 2017, Treasury projected the government’s gross loan debt ratio would peak at 52.9% of GDP in 2018/19, decreasing thereafter to around 50% of GDP by 2024/25.

The far higher debt trajectory on which South Africa ended up relative to this projection partly reflects the impact of the Covid-19 pandemic, but also to a large extent muted GDP growth (which has constrained revenue collection apart from the recent boost from the commodity boom), persistent spending pressure and support for state-owned companies.

History shows that successful fiscal consolidation is unlikely without expenditure cuts relative to GDP. However, although the projected level of consolidated government spending is cut from its level of 32.6% of GDP in 2022/23, it remains high at 32% of GDP and 31.7% of GDP in 2023/24 and 2024/25 respectively, before decreasing to 31.2% of GDP by 2025/26.

Over the medium-term expenditure framework this amounts to an average annual increase in spending of 4.5% (or 3.8% excluding reserves) in current prices. At the same time, consolidated non-interest spending contracts by an annual average of -1% in real terms over the next three years.


Constraining spending to this extent in the current socio-economic environment will be difficult. Upward risks to the expenditure profile include the wage bill, which is projected to increase by just 3.3% in current prices per year on average over the period from 2023/24 to 2025/26. Given expected average inflation of 5% over the next three years and assuming government employment numbers remain largely unchanged, this suggests a significant decrease in real pay per worker.

In addition, social grants increase by an average of merely 2.2% per year in current prices over the three years, reflecting the termination of the social relief of distress grant in 2024/25. This seems untenable. The potential extension of the grant remains under consideration, with Treasury noting it can only be sustained if taxes are increased or spending is cut elsewhere.

Overall, there is some comfort in the fact that the budget includes a cumulative contingency reserve of R15 billion over the next three years, in addition to unallocated reserves of R35.7 billion in 2024/25 and R44.5 billion in 2025/26. However, the upside risks to spending, the opaque outlook for GDP growth and potential additional bailouts for ailing state-owned companies imply that the jury is still out on the projection of debt stabilisation over the medium term.

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