Stabilising debt, funding critical services and responding to the promises made in the SONA are among the many balls South Africa’s finance minister must juggle during his budget speech, reveals KPMG South Africa lead economist.
Amid a lacklustre economy plagued by surging government expenditure, high debt, and a widening budget deficit – and ahead of critical national elections – finance minister Enoch Godongwana will deliver his Budget Speech on 21 February. While he is expected to outline all the financial, economic and social commitments that the government will prioritise in its planned expenditure, many are wondering: how does he plan to tackle the country’s myriad financial problems?
It is clear that the National Budget in 2024 will be tough for the minister, with a combination of tax revenues under-performing compared to expectations, and an increase in demand for additional expenditure.
For one thing, South Africa’s situation this year is no better off – probably worse – than the last two years. This means that the dominant theme of the Budget address will likely remain focused on stimulating economic growth, while trying to stabilise the fiscus and the nation’s finances.
Of course, many of the key problems facing South Africa currently are due to persistently low economic growth. In fact, the economy only grew by around 1.7 percent in the decade prior to the pandemic, and has been even lower since then. Unfortunately, expectations for the forthcoming year don’t appear any brighter, and are likely to put businesses under pressure and create a tough environment for decision-making – something that South Africa’s business leaders are resilient against, thankfully.
Infrastructure challenges and social relief
As we head into what will be the 17th consecutive year of loadshedding, it is obvious that our ongoing power challenges are holding back economic growth, while the continued deterioration of logistics infrastructure – our road, rail and port facilities – is severely impacting the movement of goods to the markets where they are sold, further holding back economic growth.
Despite an overarching need to attract investment into the country, this is becoming increasingly questionable, given the structural challenges we face in respect of our logistics and infrastructure.
While mention was made in the medium-term budget speech of the need to close or merge certain functions within government that have not been performing effectively, we can once again expect this issue to be raised. In the same medium-term budget policy statement, the minister noted that debt would be stabilised by 2025/26. Realistically, however, we can expect a shift in this deadline due to all the demands on the expenditure side.
Reading from statements made in the State of the Nation (SONA) address, possible areas where additional funding will be allocated include both electricity and logistics infrastructure. Mention was also made of innovative funding methods, which we can expect to hear about in more detail in the budget speech. I would imagine such funding refers to the private sector getting more involved in improving this infrastructure, which would be a good thing for business.
There is another additional funding requirement in respect of the announced extension of the social relief of distress grant. Assuming there are eight million beneficiaries, it would require an extra R34 billion funding for this year. There is a strong possibility that this grant will ultimately evolve into a basic income grant to some extent, which will mean the nation will then require this R34 billion to be perpetually funded out of the fiscus.
Similarly, the National Health Insurance (NHI) implementation – while incremental, meaning not much will be seen immediately – will require offices and employees once the Bill is signed, which too will represent new demands for funding.
Education, safety and security, and healthcare were all specifically mentioned in the SONA, with the health sector specifically emphasised. Here, the inability to hire extra doctors and other medical staff means that more healthcare funding will be required from the new budget.
Debt stabilisation issues
We can also anticipate additional budgetary demands from ailing state-owned enterprises (SOEs), and although every year we are told this is the last time, there’s little doubt more bailouts will be needed in 2024, though the question of where the money will come from remains.
In an election year, it is unlikely that personal income taxes will be adjusted, so at least some relief will be found through revising certain spending plans within the budget – essentially moving money from one area to another. Also, the traditional increases in sin and fuel taxes can be expected, even though these taxes are not strong indicators at keeping costs down within the economy.
Borrowing will most likely continue to be the main source of this money, which counteracts the narrowing of the deficit and the stabilisation of debt. Thus, both deficit and debt are likely to increase, leading to South Africa’s debt servicing costs growing. This, of course, is not healthy, as our debt already sits at around 20 percent of revenues and is likely to grow further, which unfortunately negatively impacts the stability that is needed, and has a knock-on effect for businesses.
Although the finance minister does a good job of preparing the budget under the trying constraints he faces, there remains the problem of budget credibility. By this I mean that over the past few years, within months of the budget being announced, it is inevitably broken, something regularly confirmed in the medium-term budget policy statement.
Thus, it is imperative to create a credible budgeting process going forward, with strict discipline on the expenditure side of the budget, if we ever hope to be able to extract the country from its current slide, and especially if our goal is to attract additional Foreign Direct Investment (FDI).
However, interest rates are expected to decrease from around the middle of the year, which is good news and will help to take some pressure off consumers and businesses alike, as well as contribute to higher growth rates for this year. The one caveat here is that the world faces several geopolitical risks that could reduce – or even reverse – the expected positive impacts of the interest rate reductions.
So, while there are some positives, unfortunately business leaders are in for another year of tough decision-making, frugal spending and finding a balance between driving business growth and simply driving stability – stability being what every business should be gearing towards as a goal for the upcoming fiscal.
