Joon Chong | Partner | Webber Wentzel | mail me |
Minister of Finance Enoch Godongwana will deliver the 2024 Budget Review to Parliament next week as the South African economy faces a gloomy economic outlook. The economy is still recovering from the impact of COVID-19 and state capture.
Continuous load shedding, water restrictions, corruption, the deteriorating Rand, crumbling infrastructure, cash strapped state-owned entities requiring ongoing bailouts, high interest rates, and high unemployment has further weakened the economy.
Curtailing the widening budget deficit
Existential factors such as geopolitical conflicts and climate change raises the costs of imports including gas, oil, diesel fuel and agricultural products, negatively impacting the year-to-date trade surplus.
The trade statistics released by the South African Revenue Services (SARS) indicate that the year-to-date (01 January to 31 December 2023) preliminary trade balance surplus of R61 billion is R131 billion less than the R192 billion trade balance surplus for the comparable period in 2022.
The government gross loan debt is R5,2 trillion for 2023/2024. In its Budget 2024 preview, Nedbank estimates the finance costs of that debt to be R367,2 billion. National Treasury is faced with the task of trying to curtail the widening budget deficit of R378,8 billion (5.4% of GDP) for 2023/2024, reining in government expenditure, and bringing down the cost of the current debt.
Nedbank further noted that the National Treasury advanced a R47 billion bailout package for Transnet in November 2023, which has debt of R130 billion. Nedbank assumes that further financial assistance of R25 billion a year will be required in 2024/25 and 2025/26.
The 2023 Medium Term Budget Policy Statement (MTBPS) indicated that the Eskom debt package will require additional borrowing to provide R78 billion in 2023/24, R66,2 billion in 2024/25, and R110,2 billion in 2025/26. The Budget Review 2023 indicated that debt relief would also be given for the interest on these loans.
Raising additional domestic debt
The National Treasury faces the difficult task of raising additional domestic debt in this high interest rate environment, and foreign debt which becomes more expensive with the weakening Rand.
The MTBPS further provided for, amongst others:
- an additional R15 billion in tax revenue in 2024/2025 through proposed tax measures;
- fiscal consolidation to be implemented through spending reductions, efficiency measures across government and moderate tax revenue measures;
- a joint team to prepare recommendations such as the closing or merging non‐performing entities; and
- outdated and unproductive programmes and entities to be scaled down.
Nedbank expects that additional revenue will be raised from the usual adjustments of tax brackets:
- The personal income tax brackets will likely be adjusted by less than the inflation rate, benefitting the low-income brackets. The higher income tax brackets are likely to be adjusted minimally.
- The fuel levy could rise by around 5% in line with the inflation rate.
- Medical aid tax credits are likely to be unchanged.
- Excise duties on tobacco and alcohol products will be raised by more than inflation.
- Tax breaks for investment in renewable power generation tabled in February 2023 are not likely to be expanded, although they could be extended for another year.
We anticipate that NT in the Budget Review 2024 will also:
- introduce tax incentives to encourage the private sector to invest in infrastructure. (To finance these tax incentives less productive tax incentives may be curtailed);
- come up with a plan to rationalise government departments, entities and programmes over the next three years, thereby saving costs;
- implement controls on creating and filling vacant posts, including providing incentives for early retirement to reduce the public service wage bill;
- introduce controls to anchor fiscal sustainability;
- continue the social protection expenditure programme, including the old age grant, child support grant, the disability grant and the social relief grant; and
- continue the comprehensive public employment programme.
The 2024 Budget Review would need to strike a precarious and delicate balance between short-term solutions and long-term sustainability. The nation awaits Minister Godongwana’s proposals with bated breath, hoping for a roadmap to economic recovery.