Hats off to finance minister Enoch Godongwana, the magician of Mzansi.
Godongwana has managed to craft a budget on the coattails of the commodity boom that honours South Africa’s commitment to fiscal consolidation while also saving Eskom, providing tax relief, protecting pro-poor spending and steering more funds towards infrastructure.
It shows that years of dogged persistence (aided by the windfall taxes from the mining sector) have paid off. And it has allowed South Africa to declare a primary budget surplus in 2022/2023 for the first time since the global financial crisis — a year ahead of schedule.
This is a significant milestone on South Africa’s journey towards fiscal sustainability — but the country is not there yet.
South Africa will need to maintain and grow the tiny primary surplus of 0.1% for another three years if it is to achieve the holy grail of debt stabilisation. And that is an extremely tall order in an extremely uncertain global and domestic economic environment.
Of course, it all would have been so much easier were it not for the need to provide a R254bn debt relief package to Eskom. Without the additional borrowing this entails, government debt would have stabilised this year at roughly 71% of GDP — three years ahead of schedule. Instead, it will now keep rising to peak at 73.6% in 2025/2026, before gradually declining.
But this outcome is far from certain. South Africa cannot expect a repeat of the huge tax revenue overruns — of almost R200bn in 2021/2022 and close to R100bn in 2022/2023 — that have allowed for the significant improvement in its fiscal position.
These windfall revenues were fuelled by South Africa’s economic recovery from Covid, accelerated GDP inflation and high commodity prices. There is now a significant risk that global and domestic growth could turn out weaker than expected and that global financial conditions could tighten. This would reduce South Africa’s ability to borrow, and curtail the budget deficit.
On the expenditure side, a multitude of pressures are building. This includes the likelihood that weak state-owned entities (SOEs) will demand further bailouts; that public service wage agreements will exceed the tight budgeted amounts; and that new unfunded spending programmes will be introduced, such as a basic income grant (BIG).
This means that while the National Treasury has managed to find R227bn in new money to add to medium-term baseline expenditure — as well as provide R13bn in tax relief this year — it is still going to have to run a very tight ship.
Political pressures
The reality is, debt will not stabilise at 73% of GDP unless consolidated noninterest expenditure contracts by an annual average of 1% in real terms over the next three years. And that is something that many economists consider politically implausible, given that 2024 is an election year and the ANC’s majority is hanging by a thread.
On the other hand, the Treasury is quick to point out that it has a good track record in containing government consumption spending to nearly zero in recent years. And, it says, the path towards debt stabilisation will be achieved without resorting to unsustainable borrowing, damaging tax increases or further cuts in the social wage and infrastructure.
Indeed, the 2023 budget wears a distinctly human face in its efforts to shield businesses and households from the cost of living crisis, including the impact of rolling blackouts.
It provides full relief for fiscal drag (worth R15.7bn in tax revenue forgone), it imposes no new tax increases, no increases to the Road Accident Fund, and no new fuel levies. And it provides R9bn in new incentives to encourage investment in renewable energy.
“This is not an austerity budget,” says Godongwana. “This is a budget that makes tough trade-offs in the interests of the country’s short and long-term prosperity.”
Almost R230bn in additional money is being made available over the medium term, though this is mainly to address shortfalls in salary budgets in provincial health (which gets an extra R23bn) and education departments (an extra R22bn), which bore the brunt of previous budget cuts.
A further R66bn will go to social development, with R36bn earmarked to fund the extension of the R350 a month social relief of distress (SRD) grant until March 2024. Another R30bn will be used to keep other social grants rising in line with inflation.
A welcome R14bn more will be allocated to fight crime and corruption, including R7.8bn more for the South African Police Service to appoint 5,000 police trainees a year.
Like last year, the budget provides extra support to the law enforcement agencies, including the National Prosecuting Authority (an extra R1.3bn over the medium term), the Special Investigating Unit (an extra R100m), and the Financial Intelligence Centre (an extra R265m). Meanwhile, the South African Revenue Service (Sars) gets R1.5bn more to improve its revenue-raising capabilities.
Focus shifts to infrastructure
As in previous years, there is an effort to shift the share of government expenditure away from consumption towards more productive spending that supports economic growth, such as infrastructure investment.
Though 60% of consolidated noninterest spending will go towards the social wage over the medium term, capital spending will rise from 8% of total spending in the current fiscal year to 9.4% by 2025/2026. Over that period, government spending on buildings and fixed structures will increase from R62bn to R104bn.
Sanisha Packirisamy, an economist for Momentum Investments, says real growth in capital outlays is expected to average 9.7% over the medium term, while wage bill growth is expected to drop by 1.5%, on average, during that time.
This will bring the share of employee compensation (in the noninterest spending bill) down from 31.8% in 2022/2023 to 30.7%.
Still, Packirisamy is sceptical that this will be achieved, given South Africa’s rising cost of living pressure and the threat of strikes by public sector unions. (Unions are demanding a 12.5% increase for the coming fiscal year against the government’s offer of 4.7%).
As ever, the fastest-growing item of state spending is the cost of servicing debt, which is expected to grow by almost 9% on average over the next three years, rising from R307.2bn now to R391bn by 2025/2026. By comparison, the learning and culture budget is set to grow by 3.6%, and health by just 2.7%.
It is a sobering thought that the cost of debt will continue to rise so fast, despite the intention to run a primary surplus and reduce the consolidated budget deficit from 4.2% of GDP to 3.2% over the next three years. (If this is achieved, it will be the lowest deficit ratio since 2017/2018.)
Indeed, it is precisely because of South Africa’s elevated borrowing costs, coupled with the size of its debt mountain (R4.72-trillion and counting), in an environment of low growth and high inflation, that South Africa must run continuous primary surpluses to stop the debt ratio from rising.
This is why the Treasury is continuing to build fiscal buffers. Investors will draw comfort from the fact that it plans to stash a combined R95.2bn into the contingency and unallocated reserves over the medium term.
Implicit in this move is the expectation that the SRD grant (which costs R36bn a year) could be extended or expanded into a basic income grant (BIG) in 2024 just before the general election.
‘A BIG means higher taxes’
However, Godongwana is clearly not going to be a pushover when it comes to conceding to demands for an unsustainable BIG. During the budget press conference, he said BIG proponents tend to ignore the fact that the government already spends R200bn a year on pro-poor services and benefits.
He also reiterated the Treasury’s position that a permanent increase in spending must be accompanied by a permanent increase in revenue. “You must know if you’re calling for a BIG that you are [also] calling for me to tax you,” he said.
Asked in a briefing to defend the credibility of the budget given its reliance on uncertain expenditure restraint, Edgar Sishi, head of the Budget Office, pointed out that the Treasury has succeeded in restraining government consumption spending growth to almost zero for the past few years.
“And we plan to keep doing that,” he said. Sishi said there was still room to find more savings by merging and rationalising public entities and finding efficiencies across various government programmes.
But scrounging for further savings can only take South Africa so far; what is really needed is faster growth.
The Treasury’s base case is that real GDP growth will slow from 2.5% in 2022 to 0.9% this year (the previous forecast was 1.4%), rising to 1.5% in 2024 (previously 1.7%) and 1.8% in 2025.
This is roughly in line with the prevailing consensus. It means growth will average just 1.4% over the medium term — which is below population growth and the level needed to generate significant employment.
In an alternative upside scenario, (Scenario A on the graph) the Treasury estimates that growth could average 1.8% over the medium term if South Africa’s energy reforms are fully implemented and load-shedding is eliminated by the end of this year. In that case, it would unleash R173bn in pent-up investment over the medium term.
At the opposite extreme (Scenario B), power cuts intensify in 2023 and 2024 and there are further delays in procuring new generation capacity. In that case, real GDP would slow to 0.2% in 2023, and recover to 1.3% only in 2025. (This is similar to the Reserve Bank’s bleak forecast, which is for growth to come in at 0.3% this year, rising to 1% by 2025.)
In Scenario C, global growth slows, and tighter global financial conditions and heightened global risk aversion reduce demand for South African financial assets, while inflation remains elevated. In that case, South Africa’s medium-run growth would average 1.1%.
Departing from reality
On one point, the Treasury is exceedingly clear: higher economic growth will require the acceleration of economic reforms, especially in the areas of electricity and freight rail.
In exchange for providing R254bn in debt relief to Eskom, it is demanding that the utility implement key reforms, including repairing and concessioning off those coal-fired power stations that can be resuscitated and allowing extensive private-sector participation in the development of its transmission network.
But Wits University adjunct professor Michael Sachs is highly sceptical that these conditions will ever be achieved, saying they would require “a major change” in government behaviour.
He likens the Eskom debt relief package to the Treasury having “pulled a rabbit out of a hat” — and not in a good way, but rather “in the way a magician does by departing from reality”.
“It’s good for the Treasury to push these things, but we’ve been here before. Is [President Cyril] Ramaphosa really going to turn around and enforce all that on the ANC?” he asks.
He thinks there’s a strong chance that these conditionalities will never be met. And if that happens, the Treasury could end up dribbling permanent cash flows to a costly, underperforming electricity sector.
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