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Arthur Kamp

Investment Economist at Sanlam Investments

On balance, Finance Minister Enoch Godongwana’s third Medium-Term Budget Policy Statement (MTBPS) delivered last week is as good as can be expected under the circumstances – it is a strong attempt at curbing government expenditure and staying the course on fiscal consolidation. Nevertheless, execution risk remains high.

Ultimately, the Mini Budget reflects a familiar outcome as the trajectory of the government’s debt ratio was revised higher. Gross loan debt is now expected to peak at 77.7% of gross domestic product (GDP) in 2025/26 before moderating, according to National Treasury’s projections. This compares with the expected peak of 73.6% of GDP in 2025/26 published in the February 2023 Budget Review.

In the current fiscal year, tax revenue is expected to undershoot initial projections by R56.8 billion. In large part, this reflects lower-than-expected revenue from mining firms and net VAT receipts. In tandem, electricity loadshedding and the downturn in commodity export prices are restricting income, company profits and, ultimately, domestic spending. After adjusting for upward revisions to other revenue (mostly expected revaluation profits from foreign currency transactions), total revenue is expected to decrease by a net R44.4 billion in the current fiscal year.

Accordingly, the MTBPS projects a larger Main Budget deficit of -4.7% of GDP in 2023/24, relative to the initial projection of -3.9% of GDP published in February 2023. This excludes support for Eskom, amounting to R78 billion (1% of GDP) in the current fiscal year, which must, however, be funded.

Although National Treasury has lowered the expected tax buoyancy over the medium term, tax revenue is forecast to grow faster than nominal GDP over the next three fiscal years. In part, this reflects expected revenue-raising measures amounting to R15 billion in 2024/25 (read: possible tax increases). Even so, forecast revenue collection in 2024/25 and 2025/26 is reduced by R121.4 billion relative to the initial 2023 Budget estimates.


Meanwhile, Treasury is still intent on following through on its fiscal consolidation promise, but this is becoming increasingly difficult as high interest payments on the government’s large debt stock absorb an ever-increasing share of available resources.

Despite an upward revision of R23.6 billion for the government wage bill, plus R5.9 billion for other selected national expenditure components, Main Budget non-interest spending is projected to decrease by R3.7 billion in 2023/24 relative to the original budget projections, since Treasury has cut R33.1 billion in spending elsewhere (including a drawdown on the contingency reserve).

However, state debt costs were revised up by R14.1 billion, leaving total Main Budget spending R10.3 billion higher than previously expected. In 2008/09, debt servicing cost amounted to 8.8% of Main Budget revenue. This has increased to an estimated 20.7% of revenue in 2023/24 (or R354.5 billion), crowding out other spending.

History shows that successful fiscal consolidation requires expenditure cuts. The 2023 MTBPS delivers on this, reflecting a decrease in the ratio of Main Budget non-interest spending from 24.1% of GDP in 2023/24 to 22.7% of GDP in 2026/27, effectively lowering the expenditure ceiling over the medium term.

Viewed more broadly, total consolidated expenditure is expected to increase 4.6% on average per year in current prices. Excluding debt servicing cost, which is expected to grow at 8.7% on average per year, non-interest spending is budgeted to increase just 3.6% per year.


However, herein lies the risk for the fiscal outlook. Planned expenditure restraint looks too onerous, even though the government expects to implement targeted cost-saving measures, including merging or closing public entities. Projected consolidated expenditure is below expected inflation, implying reduced spending in real terms. For example, compensation of government employees increases at an average 3.6% per year over the next three fiscal years, relative to average inflation of 4.5%.

Moreover, the expenditure cuts announced include a drawdown of the contingency reserve. This leaves a cumulative contingency reserve of just R27.1 billion for the next three years.

Further, the social relief of distress grant has been extended for one more fiscal year only (at a cost of R33.6 billion). However, it will ostensibly need to be extended from 2025/26 (or be replaced by a basic income grant).

In addition, there is no provision for likely additional transfer to state-owned companies (SOCs) including, potentially, Transnet. As regards the latter, Treasury insists the SOC must first demonstrate an ability to improve efficiency, foster competition and tap into the ‘financial and technical support’ of the private sector before assistance will be considered.


It is, therefore, by no means certain that Treasury will be able to stick to its projected expenditure to support its objective of reducing the Main Budget deficit to -3.7% of GDP in 2026/27, while also improving the primary budget balance (revenue less non-interest spending) from a surplus of 0.3% of GDP in 2023/24 to a surplus of 1.7% of GDP in 2026/27 in order to stabilise the debt ratio.

Given larger budget deficits than previously expected, the government’s gross borrowing requirement for 2023/24 increases to R563.6 billion in 2023/24 from the initial estimate of R515.6 billion, although Treasury has indicated no increased weekly issuance for the remainder of the current fiscal year in fixed rate government bonds and inflation-linked bonds (implying a willingness to tap into other funding sources, likely including rand-denominated sukuk bonds). The borrowing requirement increases to R623.4 billion in 2025/26 before decreasing to R478.2 billion in 2026/27.

On balance, the 2023 MTBPS is as good as can be expected in the circumstances. Expenditure is cut, while consolidated spending on payments for capital assets grows strongly at an average of 10.4% per year over the next three years, implying an ongoing (albeit slow) shift in the composition of spending away from consumption. However, the jury is out on whether the government can deliver on the planned expenditure restraint while unfavourable debt dynamics continue to drive the debt ratio higher over the medium term

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