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BUDGET SPEECH 2024 PREVIEW

Stagnating economy, ballooning wage bill and struggling tax base – Godongwana’s Herculean task

Stagnating economy, ballooning wage bill and struggling tax base – Godongwana’s Herculean task
Finance Minister Enoch Godongwana. (Photo: Gallo Images / Ziyaad Douglas)

This week, attention will be focused on the Budget Speech, which will be delivered by Minister of Finance Enoch Godongwana on Wednesday, 21 February. It will have to be a delicate balancing act.

The elephant in the room is South Africa’s economic growth rate — and it’s anything but on a mammoth scale.

Most forecasts for South African growth for 2024 are pegged at between 1.0% and 1.5%. Growth is simply not brisk enough to make a dent in swelling levels of debt — unless the Treasury takes a chainsaw to spending, and that’s not going to happen in an election year.

Debt is measured as a percentage of GDP. Faster levels of growth bring that percentage down, while slower rates push it up. An economy growing at a clip of 5% typically translates into more profits for business and more employment, adding to the tax base. That, in turn, means the government can borrow less. 

The difference between 5% and 1% is material on an elephantine scale.

Growth of 1% in South Africa’s economy is just in line with population growth, but the demographics of youth mean it is not fast enough to absorb new entrants into the labour market and expand the tax base.

“South Africa’s October Medium-Term Budget Policy Statement (MTBPS) growth forecast for 2023 was overly strong, at 0.8% year on year, with the outcome most likely to be 0.5% year on year, which will add to the upwards pressure on the gross loan debt-to-GDP ratio, not detract from it,” Investec chief economist Annabel Bishop said in a note on the Budget.

“For 2024, the MTBPS’s growth forecast is aligned to ours, at 1.0% year on year, but for 2025 the MTBPS’s 1.6% year on year is likely to prove too strong, given persistent load shedding, risking lifting the gross loan debt projection to GDP for 2025/26 too.”

For the current fiscal year, the 2023 budget forecast a debt-to-GDP ratio of 72.2%, which was revised up in the MTBPS to 74.7% of GDP.

“With the first three quarters of 2023/24 showing expenditure at 74.2% of budget, ahead of the 70.1% of the same period of 2022/23, and revenue at 71.5% of budget, under the 72.2% of the comparable period, a marked drop in the projected debt-to-GDP ratio for this year is unlikely,” Bishop noted.

Budget deficit

PwC projected a budget deficit — the gap between government spending and revenue — of 4.9% for the forthcoming 2024/25 financial year and sees that falling to 3.9% by 2026/27.

On the debt front, one vexed issue is the vast amounts that have been accumulated by malfunctioning state-owned enterprises.

“We expect that the minister will announce progress in the amount of debt that has been transferred and guaranteed, whether the conditions have been met, and what actions have been taken with regard to state-owned enterprises that are not meeting the set conditions,” PwC said.

First National Bank’s chief economist Mamello Matikinca-Ngwenya pointed out that spending pressures had surged, pushing expenditure beyond projections from the 2023 MTBPS and the 2023 Budget Review. Debt service costs have increased by 17.1% for the fiscal year-to-date, exceeding the 14.9% 2023 MTBPS estimate. Non-interest expenditure has also risen significantly by 6.3% for the fiscal year-to-date, reflecting evident expenditure pressures.

“These trends, including ongoing poor revenue performance, are poised to widen the fiscal balance deficit, surpassing the R330-billion envisaged in the 2023 MTBPS. We anticipate the fiscal deficit to be approximately 5% of GDP in 2023/24, compared with Treasury’s projection of 4.7%,” she said.

Speaking of expenditure, Associate Professor David Warneke, a partner at BDO South Africa, said it was almost a certainty that there would be a continuation of the Social Relief of Distress grant.

“Having already factored in an extension of the grant in the medium-term budget until March 2025, it is unlikely the minister will go back on this,” he said, adding that the grant — vital for about nine million South Africans — underscored the government’s commitment to supporting vulnerable segments of society, especially in an election year.

However, Warneke cautioned that with an annual price tag of about R44-billion, the grant’s long-term sustainability and impact on the national budget merited careful consideration.

Enormous wage bill

Public sector wages are a contentious issue and a considerable millstone weighing down the government’s budget. After announcing that public sector wage increases would be limited to 3.5% in last year’s budget, the government backtracked and pushed through an annual increase of 7.5%. This puts considerable pressure on an already stretched budget, when public servant remuneration is already the single largest component of government expenditure, gobbling up 30% of 2023’s R2.26-trillion budget.

“As we approach another election cycle, the government may seek to avoid negotiations and go directly ahead with proposing a modest increase of around 5% to 6% to appease public servants,” Warneke said. However, he noted that any increase was bound to raise concerns about the sustainability of the public wage bill, particularly when compared with international standards.

South Africa has one of the highest-paid public sectors in the world, with a total wage bill 3.5% higher than the average in countries that are part of the Organisation for Economic Cooperation and Development. This makes up about a third of total government expenditure and is not performance-based, meaning increases are applied across the board.

National Health Insurance

sona ramaphosa

President Cyril Ramaphosa prepares to deliver the 2024 State of The Nation Address at Cape Town City Hall on 8 February 2024. (Photo: Shelley Christians)

During his recent State of the Nation Address, President Cyril Ramaphosa joked that he was “looking for a pen” to sign the controversial National Health Insurance (NHI) Bill into law. Ramaphosa said the government planned to “incrementally implement the NHI, dealing with issues like health system financing, the health workforce, medical products, vaccines and technologies, and health information systems”.

Although this sounds great in theory, the reality is that the NHI will require substantial budget allocations — and there has been little indication of where the funding will come from.

PwC noted that, similarly, the fate of state-owned enterprises remained uncertain, with discussions on mergers and closures ongoing. 

“Any decisions must balance fiscal responsibility with the need to streamline operations and improve efficiency. Once again, given elections, it is doubtful that anything will be announced here as it might imply job cuts,” the PwC pre-Budget note said.

Taxing times

The two certainties in life are death and taxes. The question is, by how much will taxes increase? The minister of finance already warned in the MTBPS that there was a need to extract taxes worth another R15-billion.

Warneke said an increase would mean taking the risk of further burdening an already strained populace, which the minister may not want to do ahead of the polls. “Additional tax may also be extracted through less than full inflationary relief from bracket creep,” he said.

Revenue collections are widely expected to undershoot the 2023 budget estimates by R56-billion, on the back of declining corporate income taxes. Old Mutual’s head of tax, Nazrien Kader, suggested that the government could, in line with Economic Cooperation and Development recommendations, join international counterparts by introducing a 15% top-up tax. This is a global minimum tax of 15% payable by the ultimate holding companies of multinationals operating in South Africa.

But the decrease in corporate income tax suggested that tax collections through personal income tax and VAT collections would once again hold the fort, she said. 

“In an election year, however, some would say it would be suicide to increase any new taxes.” Having said that, she noted that there were no expectations of any incentives or tax allowances for taxpayers.

Matikinca-Ngwenya said she expected the proposal of tax measures to raise additional revenue of R15-billion in 2024/25. This is expected to involve fiscal adjustments targeting middle- to high-income households, potentially including an increase in the general fuel levy. She cautioned that this could have a negative impact on cyclical growth. DM  

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Comments - Please in order to comment.

  • Mpumelelo Mdoda says:

    Budgets always pose trade-offs regardless of how well oiled or run downed an economy can be.
    South Africa’s case, becomes chronically difficult to even do budgets, hence on one occasion the government needs to start looking at the way budgets are been done. Either we choose a route of Zero rated budgeting system to reduce the burden of the state or continue with traditional budgeting system and we’ll all fall sink deeper into a sovereign debt crisis.

  • Mpumelelo Mdoda says:

    Budget 2024 would be about choosing bread and butter or crumbs and water. Essentially what this means is that low economic growth vs ballooning population growth has been the perfect storm for South Africa’s crisis. Social grants have made the population more relaxed to have more children for more grants which has become a commodity for some to live.
    One of the important aspects of budgets is how you plan for budgets according to needs and wants of the country, either we change the budgeting system from traditional to zero rated budgeting system for value for money or we end up becoming Rhodesia 2.0.

  • Andrew Molyneaux says:

    I recently completed reading the Annual Report from SARS released December 2023 – My take is that SARS are doing a fairly respectable job at collecting what is due – One aspect that concerns me is that a significant portion of SARS collections is historical debt and once this has been realised it is reasonable to assume that, as the tax base is shrinking, as the ecominc woes of an ANC lead Government persist, then the Government is going to run out of money – It is a given that SARS are better at collecting money than the Government which seems to have little or no clue as to how to spend it – A recipe for disaster !!!

    • Lew Lipschitz says:

      SARS is nowhere near what would constitute an efficient tax collection agency!! South Africa has less tax payers than Greece, a country with only 11 million people. Explain that wiseguy!

  • Lynda Tyrer says:

    Yes he does have a battle but 90% is because he has a party of great wasters and spenders and they ignore his instructions to cut back they including unions think money grows on trees.

  • Rama Chandra says:

    Like many governments, the ANC wants to bribe the rich with low taxes and bribe the poor with cash handouts. Meanwhile debt accumulates and infrastructure crumbles. Wealth and income Gini coefficients are higher than ever, but the poor at least don’t need to work for their misery. Instead the ambitious poor resort to crime. Oh for an actual honest politician!

  • Walter Hay says:

    This year’s budget is governed by the electioneering of the ANC, gasping for financial ‘where to find it’ support money.
    Enoch… I’m afraid you will be
    either David Copperfield flying but with less financial support string to keep your heavy budget torso from free fall or
    Houdini but not enough time to unlock the ANC’s death throws to find cash and gather votes as it sinks into its own manufactured demise. We told you so Cyril… Sorry Enoch.

  • mullanygraham says:

    These are all own goals. I don’t think the ANC realises just how many major tax payers have left SA. From my family alone, 8 taxpayers have emigrated in the last 2 years. Additional tax is a temporary solution – taking from the dwindling rich and giving to the poor.

    • Random Comment says:

      I can personally attest to this, too – so many professional colleagues and their families have left since COVID, it is hard to keep track of who went where.

  • Arno Stijlen says:

    In a ‘normal’ society with good governance and financial structures in place, it will not be a problem to gain the necessary income to cover most government expenditure and still have funds available to grow the economy, create jobs etc. Start managing the country with competent leadership and other qualified individuals that care about the people of the country and serious about business, do away with draconian laws that prohibit growth and encourages the creation of undeserved wealth and the whole scenario will be different and easy to overcome the current financial constraints that the minister currently faces – but who’s listening?

  • Confucious Says says:

    Imagine letting the facts get in the way of more spending?!

  • Barrie King says:

    I suggest taking a leaf out of Roger Jardine’s latest suggestion to tax the wealthy (above R1.8m pa), increase corporate tax rate for a limited time, and 1% 0n pension fund reserves to raise R500bn! Excellent idea to reconstruct the country, create jobs, and assist the poorest!

    • Rod H MacLeod says:

      Of course – “don’t tax you and don’t tax me, tax that fellow behind the tree”. Everybody wants someone else to foot the tax bill. Get the rich guys, get the pension funds, get the savings accounts, get the fat white boys – anyone except me. But guess what? Tax payers are mobile – they don’t cross the Mediterranean on tiny boats, they fly to where it’s summer whenever they want. And they can move their business where they want. If you become tax non-competitive, you will lose capital creation. If you stop creating capital, you will lose income. If you lose income, you will become poor. REDUCE TAXES and CUT COSTS!!!!

    • Marcus Struik says:

      Sure…

    • Johan Buys says:

      Barrie:

      Taxing pension fund savings is literally = stealing from the future. What makes this worse is the tax will go to operating expenses, not economic infrastructure.

      Unlike OECD we have very little by way of discrete social welfare so yes we have immense suffering. But what the analysts fails to highlight is that in countries with high social welfare, they also collect as direct deduction very substantial social welfare contributions. Despite all our ubuntu and empathy, our 24m workers will not stand for paying R600pm extra in social welfare deduction even if means 20m of their desperate comrades can then receive R750pm. Ubuntu seems to stop at the protest placards???

    • Random Comment says:

      Your solution is MORE TAXES? Good grief, have you heard of State Capture or loadshedding or cadre deployment?

  • Tivan Leak says:

    “Debt is measured as a percentage of GDP. Faster levels of growth bring that percentage down, while slower rates push it up. An economy growing at a clip of 5% typically translates into more profits for business and more employment, adding to the tax base. That, in turn, means the government can borrow less. ”

    It means government can borrow more, not less. I think you meant government doesn’t have to rely on borrowing as much when the economy grows at a faster pace?

  • Marcus Struik says:

    “South Africa has one of the highest-paid public sectors in the world, with a total wage bill 3.5% higher than the average in countries that are part of the Organisation for Economic Cooperation and Development. This makes up about a third of total government expenditure and is not performance-based, meaning increases are applied across the board” – that says it all !

    Spineless, all of them. Afraid to make the right decisions. Instead they burden those that pay taxes with more taxes. Enough !

    • alison ellard says:

      This is the gift the ANC has left to their future generations. They are the ones who will suffer the consequences for generations to come and who will be tasked with the almost impossible job of rebuilding the country. It is beyond belief.

  • Norman Sander says:

    Sa will start to borrow $’s or some other currency and the Rand will depreciate, making loans more and more difficult to repay. This will ll just speed up the rate of decline of the economy in SA.
    The Socialists have simply run out of other peoples money.

  • Rob vZ says:

    30% of our budget goes to the salaries of 3% of the population.

  • Johan Buys says:

    “ In an election year, however, some would say it would be suicide to increase any new taxes”

    The party will do the math and figure announcing a form of asset taxation or removing the inclusion rate on capital gains will annoy far fewer people (most of whom do not vote for the party anyway) than its populist headline potential will gain in votes.

  • The real Ellon Must says:

    Living within your means Apparently not something the current government understands. But quite willing to take actions that hamper growth and investment in South Africa. State expenditure by its nature provides very little economic growth or return on investment. A bloated bureaucracy produces nothing more than bloated bureaucrats, flaunting their ill gotten gains to the sheeples that vote for them.

  • Charles Butcher says:

    During the apartheid years price increases like the new fuel price would have been met with majoy protests and toy toying by the taxi industry. Tye reason it doesn’t happen now is because they het “state aid ” to mitigate fuel costs. Sooo what’s wrong with the rest of society, well apart from buying most of them with state jobs, the ones where you go in sign a time sheet and go home,and special
    grants to the unemployed there aren’t many out of the ANC charity net, except the businesses and hey being strangled with high costs like TAX, eskom and off course FUEL. This shows how simply stupid the governmunt is especially because they lack the all important managemunt skills putting more people on the pavemunt

  • ST ST says:

    Largely self inflicted wounds at this point. Except the wounds have actually been inflicted on us citizens….literally and figuratively.

  • Random Comment says:

    The SINGLE most important fact is that this Government plans to BORROW ZAR550BN+ PER YEAR for the next three years, which will push our sovereign debt from 4,8Tn to over 6Tn, a massive increase…

    *source: MTBPS, as per the Minister

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