What is interesting about the medium-term budget tabled in parliament on Wednesday is not that it sticks doggedly to the National Treasury’s fiscal consolidation plan to get debt to stabilise at 75% of GDP next year — that much was expected.
Nor are there any obvious political baubles from the government of national unity (GNU) — that, too, was clear going in, given the DA’s commitment to fiscal discipline.
What is new is the deliberate shift to position infrastructure creation at the heart of the country’s fiscal and growth agenda, coupled with deep reforms to embed private sector participation in infrastructure funding and delivery.
This suggests that the Treasury has fully grasped that it will never achieve fiscal sustainability without faster growth — and that the best way to achieve that is by harnessing private sector capital and expertise. As finance minister Enoch Godongwana stressed during the pre-budget press briefing: “Our challenge is a growth problem.”
The second shift in approach is to target resources at strengthening institutions. So, the South Africa Revenue Service, the office of the chief justice, the Electoral Commission of South Africa and parliament have been singled out for additional funding.
This is a good thing. However, it will disappoint provincial education and health departments which have been clamouring for more resources to preserve headcounts given the Treasury’s failure to fully fund them for the cost of the 2023 wage settlement.
Instead, it has introduced a no-penalty voluntary early retirement programme which it hopes will lop 30,000 non-essential employees off the state wage bill over the next few years. Godongwana even went so far as to deny that there is any staffing crisis in the provinces.
This will likely infuriate basic education minister Siviwe Gwarube, whose department told parliament earlier this month that it will experience a cumulative budget shortfall of R76.6bn over the medium term if the goal is to maintain adequate service provision. This swells to R130bn if recent policy changes are included, like the requirement to make universal provision for grade R.
Asked how his party felt about the medium-term budget policy statement (MTBPS), second deputy finance minister Ashor Sarupen said there was “synergy” and “broad agreement” between the DA and the Treasury.
He singled out the fact that his previous criticisms over the provision of bailouts for state-owned enterprises and the Treasury’s tendency to make overly optimistic growth forecasts have been addressed.
The Treasury’s growth forecasts are below consensus. It has revised down its 2024 real GDP forecast from 1.3% to 1.1%, after a disappointing first half. It now expects growth to average 1.8% over the medium term (previously 1.6%).
Asked whether the fact that it fails to see growth rising above 2% before 2028 reflects a lack of conviction in Transnet’s ability to relieve the logistics constraint, Treasury director-general Duncan Pieterse said various teams are working hard to turn Transnet around.
Just how pivotal that turnaround is to South Africa’s growth outlook is clear from the upside scenario sketched in the MTBPS. It projects that if the country can resolve problems at the ports and rail corridors, this, coupled with additional capacity from expected energy investments, could result in growth of 2.8% next year, rising to 3.6% by 2027.
But this is not the Treasury’s base case. Even with the raft of new reforms to the way infrastructure is going to be procured and financed, it still expects growth to remain pedestrian.
There is precious little space for error in our fiscal and economic calculations
— Business Leadership South Africa
The main headline news in the MTBPS was that due to the tepid economy and lower energy imports (now that load-shedding has stopped), tax revenue has disappointed and a R22.3bn undershoot is projected by the end of the fiscal year.
In fact, main budget non-interest revenue is expected to fall R31.2bn short of February’s projections over the next two years. Over the same period, expenditure is now expected to overshoot targets by roughly the same amount, due mainly to the anticipated R11bn cost of the early retirement plan and a R13.3bn payment to the South African National Roads Agency Ltd for the bungled e-toll scheme.
The upshot is some fiscal slippage: the deficit will be 4.7% of GDP this year, not the targeted 4.3%, and the debt-to-GDP ratio will rise to 74.7% against the target of 74.1%.
The markets reacted harshly to this news, with the rand spiking from R17.55/$ before the budget to R17.76/$ before recovering to R17.68/$ by the end of the day, while bond yields rose (weakened) by 10 basis points.
For the Treasury to deliver a growing primary surplus over the medium term, so that the debt ratio peaks at 75% next year as promised, it is going to have to keep a very tight rein on spending. The execution risks remain high — and the disappointing slippage evident in 2024/2025, though small, is a reminder of that.
Even so, Citi economist Gina Schoeman feels the markets’ reaction was a bit overdone and likely reflects that participants were expecting too much too soon based on the improved sentiment and positive narrative that have built up around the GNU.
“The fact that the Treasury has taken a cautious approach to the budget doesn’t mean it doesn’t have faith in the GNU,” she points out.
But it could also be argued, as does Business Leadership South Africa, that while it is comforting that the Treasury is aware of what needs to be done, “it is also clear that there is precious little space for error in our fiscal and economic calculations. If even a little goes wrong, our fiscal outlook [is] brittle indeed.”
It is equally possible to argue that little has changed, and this budget is really about maintaining the fiscal framework in a holding pattern while the GNU irons out some key policy wrinkles — on the future of the social relief of distress grant, the scope of National Health Insurance, the nature of the intended fiscal rule, and on the desirability of a 3% inflation target.
Clearly, the main event will be the February 2025 budget, but as few, if any, of these key policy decisions will have been taken by then, the Treasury is absolutely right to pull all the infrastructure levers it can to boost the growth rate while continuing to contain spending as best it can.
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