In fiscal year 2024/25, an expected gross tax revenue shortfall of R22.3 billion is partially compensated for by valuation gains on foreign currency transactions and provincial conditional grant surrenders, resulting in a downward revision in the total revenue estimate of R17.7 billion.
In tandem with an expected overrun of R10.4 billion in non-interest revenue (in large part due to the repayment of roads agency SANRAL debt and troop deployments to the Democratic Republic of the Congo), this implies that the Main Budget deficit is expected to be wider at -4.7% of gross domestic product (GDP) compared to the estimate of -4.3% of GDP published in February 2024.
Over the medium term, additional spending of R32.4 billion over the next two years (in part reflecting early retirement measures for government employees and payments for SANRAL debt) and a decrease of R31.2 billion in projected revenue results in larger Main Budget deficits relative to Treasury’s February 2024 estimates.
DEBT TRAJECTORY
Meanwhile, at +0.4% of GDP in 2024/25 and +0.9% of GDP in 2025/26, the primary budget surplus (revenue less non-interest spending) is not large enough to stabilise the debt ratio in a low-growth environment. Accordingly, the debt ratio is budgeted to grind higher to 75.5% of GDP by 2025/26 from a projected 74.7% of GDP in 2024/25, while the debt trajectory has also been lifted over the medium term.
At least the debt trajectory has flattened in recent years, although this, in part, reflects (i) use of the government’s previously large cash balances and (ii) access to the Gold and Foreign Exchange Contingency Reserve Account on the balance sheet of the Reserve Bank. The latter reduces the borrowing requirement by R100 billion in 2024/25 and R25 billion per year in 2025/26 and 2026/27.
Looking ahead, the favourable impact of these measures on the debt trajectory will fade. In addition, redemptions are significant in the next two years and the gross borrowing requirement is budgeted to increase from R424.7 billion in 2024/25 to R602.7 billion in 2025/26. Issuance of domestic long-term loans increases from R305.1 billion to R400.7 billion over the same period.
However, importantly, National Treasury intends to increase the primary budget surplus further to +1.8% of GDP by 2027/28 so that the debt ratio eases to 75.0% of GDP over the medium term, after peaking next year.
GROWTH FORECAST
Treasury’s projected tax revenue over the next three years is underpinned by a firmer real growth forecast, with real GDP advancing at an annual average of 1.8%. The growth forecast is reasonable and may even be exceeded should the implementation of economic reforms gain traction.
Ultimately, though, the government’s fiscal consolidation plan hinges on expenditure restraint amid dire socio-economic conditions. Consolidated non-interest expenditure (allocated by function) is projected to grow at an average of just 4.2% per year over the next three years in current prices, implying a contraction in real terms.
That said, there is significant uncertainty around the current expenditure projections, given elevated socio-economic pressures. Statistics South Africa’s General Household Survey 2023 indicates that the percentage of persons benefiting from social grants increased from 30.9% in 2019 to 39.4% in 2023, as the growth rate in the number of grant beneficiaries consistently exceeded population growth over the period.
In addition, the Budget does not make additional allocations for transfers to state-owned enterprises over and above the current assistance provided to Eskom.
Moreover, long-term spending on health is likely to increase markedly, given that access to quality healthcare needs to increase for the majority of South Africans. In 2023, more than 52 million citizens were not covered by a private medical aid.
The wage bill is another expenditure risk noted by Treasury. Total compensation is budgeted to increase by an average of just 4.5% per year over the next three fiscal years. We will need to wait until 2025 to learn the outcome of current wage negotiations.
RIGHT STRATEGY
Against this background, National Treasury nonetheless has the right strategy. To start, it aims to stabilise and reduce the debt ratio. If this is accompanied, in time, by sovereign debt rating upgrades once debt sustainability returns, debt service costs should decrease. Lower real interest rates would facilitate more investment and economic growth, while the state would have more resources available for services expenditure.
In pursuit of fiscal consolidation, there appears to be limited scope for introducing revenue-raising measures. It is telling that tax revenue is disappointing despite significant revenue-raising measures imposed on individuals. The fiscal consolidation strategy therefore of necessity requires material expenditure constraint. However, amid the expenditure risks noted above and given current backlogs in infrastructure and services, there is limited scope for this.
ECONOMIC REFORM
The only way to make the fiscal maths add up, given this set of circumstances, is to grow the economy faster, create jobs and broaden the tax base, hence the emphasis in the Mini Budget on investing in infrastructure and implementing economic reforms.
Treasury is, nonetheless, aware that this will require a large amount of funding. Accordingly, the Budget notes a number of avenues the government intends to explore to raise capital and incentivise investment into infrastructure, including reforming government borrowing for infrastructure.
The latter will be a defined category of the government’s borrowing programme, while the scope for borrowing will be expanded to include infrastructure bonds, bilateral loan financing and concessional financing from international financial institutions.
In the end, if sufficient funding can be secured to fix South Africa’s ailing infrastructure, including transport, in addition to reforms being implemented around mining licensing, telecommunications and e-visas, then economic growth may surprise to the upside, making fiscal consolidation more manageable.
