Enoch Godongwana had the unenviable task of delivering the MTBPS today against a chaotic fiscal environment characterised by weak revenue collection, limited economic growth and sky-high debt servicing costs. Despite previous budgets talking the talk on expenditure reduction and fiscal prudence, we are now seeing the impact of government continuing to load the expense base during times when excess revenue, courtesy of high commodity prices, was available. The challenge now is that lower commodity prices have caused this windfall revenue to wane, but expenses remain unaffordable.

The main issues addressed were related to increasing growth by improving the provision of electricity and logistics, enhancing the delivery of infrastructure, and restructuring the state to be efficient and fit-for-purpose. Unfortunately, budget speeches continue to correctly diagnose the problems, but have had very limited success in addressing them.

Naturally, there was also tremendous focus on our debt situation and how it can be stabilised through the reallocation of funds.

 

 

Economic Forecast

 

• Government to borrow an average of R553.7 billion per year over the next 3 years. The purpose of this borrowing will be to address:
  • Finance gaps between spending & revenue.
  • Refinance maturing debt.
  • Finance Eskom debt relief.
• Budget deficit to reach 4.9% in 2023/24, compared to the 4% estimated in the February budget.
• Real GDP growth of 0.8% is forecast in 2023, compared with 0.9% projected in the 2023 Budget Review. Growth is projected to average 1.4% over 2024 to 2026.
• Gross debt will rise from R4.8 trillion in the current financial year to R6 trillion in 2025/26.
• Debt-servicing costs as a share of revenue will increase from 20.7% in 2023/24 to 22.1% in 2026/27.
• Gross loan debt has increased by 47.2% between 2008/09 to 2022/23.
• Debt to GDP is expected to increase to 74.7%, relative to what was projected in the 2023 Budget Speech at 72.2% and is expected to increase further to 77.7% by 2025/26.
• Economic growth in the medium term can be achieved if government implements much needed policy reforms, including the promotion of the collaboration between the public and private sector and the removal of red tape to improve the ease of doing business in South Africa.

 

Electricity

 

Possibility: hope to reduce load shedding as additional capacity of over 11 000 MW from renewable resources is expected over the next three years.  Over the past two years, private sector energy investments that have been registered through the National Energy Regulator of South Africa (NERSA) have the capacity to generate over 5 600 MW.

Reality: we have already experienced more Eskom power cuts as at the end of September 2023 than we did during the previous five years combined. Government needs to come to the realisation that actions speak louder than words when it comes to loadshedding. There is no hope of sustainable growth in SA without the energy crisis being resolved quickly.

 

 

Transnet

 

Transnet's declining rail performance (characterised by operational failures, theft, vandalism and deteriorating infrastructure), threatens the economy. The cost of rail inefficiencies on the economy has been estimated to have cost the country R411 billion. There will be no bailout from the government – this is an important and perhaps unexpected ideological shift. Previously, the government has been quick to bail SOE’s out. However, the current fiscal conditions facing the country make this unrealistic, if not impossible. A small win in our opinion.

“Transnet has initiated a five-year R122.7 billion capital investment programme, including R99.5 billion for operational maintenance and R23.2 billion to expand infrastructure, starting in 2023/24”, Treasury noted in its MTBPS annexure. “Further borrowing is restricted by its existing debt, which stood at R130 billion at the end of March 2023, and declining revenues. Transnet’s issued guarantee remains at R3.5 billion”, it added.

 

 

National Treasury is insisting that SOE's must restructure before any funding is allocated. Godongwana also tabled the Eskom Debt Relief Amendment Bill to enhance the enforceability of the conditions agreed under the debt relief agreement and he said that the conditions are a key part of Treasury’s intervention in Eskom and other SOE's “to avoid a repeat of the mistakes of previous bailouts”. Most of the SOE's are in serious financial difficulties and will ultimately need government assistance.

 

Infrastructure Delivery

 

Prioritise: investment into key infrastructure by significantly increasing the extent to which the private sector is involved in financing infrastructure and providing technical expertise.

This will be done through:

• Widening the scope for concessional borrowing, where interest rates are competitive.
• Creating a new mechanism to facilitate co-investing with the private sector and multilateral institutions on selected infrastructure projects.
• Employing alternative financing instruments for priority projects.

 

Reduced Tax Collection Causes

 

• Falling corporate tax collection on the back of reduced mining sector profitability.
• Larger than anticipated VAT refund payments due to stronger than expected exports.
• The only light at the end of the tunnel was personal income tax collections which were revised upwards by more than 6% to R646.7 billion. This was due to a sustained recovery in earnings and higher bonus payments, particularly in the financial sector.
• Godongwana left us with a warning to brace for an increase in taxes to the tune of R15 billion in revenue, details of which will be announced in his February budget speech. Early speculators have made claims this may be an increase in VAT as any material changes to income tax brackets may have the adverse effect of driving taxpayers away. What is concerning here is that in previous budgets National Treasury admitted that there was limited scope to increase taxes further without negatively impacting growth. This seems to be a U-turn and National Treasure seems to be contradicting itself by suggesting further taxes.
• South Africa needs improved economic growth, creation of job opportunities, implementation of the much-needed policy reforms, improved business confidence and increase in fixed investments, to improve its tax collection in the long term, failure to which will result in further fiscal deterioration in the long term.
• Revised gross tax revenue projections

 

 

 

Social Grant

 

The Covid 19 social relief of distress grant will be extended for another year until March 2025, while government considers social security policy reforms and a funding model. The extension will result in an additional spend of R33.6 billion.

 

Public sector wages

 

Big win for public sector employees: The government will implement a pay agreement it struck with its 1.3 million employees in March, dispelling fears that it would renege on the deal. It will allocate an additional R23.6 billion to labour-intensive departments in this fiscal year to fund the accord. Despite previous budgets giving assurances of the intent of reigning in the bloated public sector wage bill, it seems that government will continue to spend money that it doesn’t have in this space. There have been questions as to whether government would have the appetite to stand up to public service unions in the run up to elections and it seems that we are starting to get the answer.

 

Conclusion

 

There does seem to be a commitment to fiscal discipline which should be seen as a positive. That said, we have heard this all before but have been disappointed by the lack of political will to follow through on the plans that have been set out in many budget speeches. We have heard many times before that the days of SOE bail outs are over, that we will limit expenditure on public service, and that we will sort out the electricity crisis. We have been disappointed time and time again as government has failed to follow through on these commitments. While government is competent at talking the talk, we desperately need it to walk the talk.

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Key MTBPS documents

 

2023 Medium Term Budget Policy Statement Speech by the Minister of Finance (1,162kb)

MTBPS 2023 Presentation - Stabilising the public finances to weather the global storm (6726kb)

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This Medium Term Budget Policy Statement review was compiled by Thuli Nkomo CFP®, Jonathan Braans CFP®, Brendon Wright, Reba Makhudu CFP® and Tumelo Magasha.