By Dondo Mogajane
There are two critical numbers to watch in the upcoming Budget Speech, as the government, the National Treasury, and Minister of Finance Enoch Godongwana seek to successfully chart a narrow path for the country’s fiscus through difficult terrain.
Following significant shortfalls in expected public income from tax revenue, these are the country’s budget deficit and its debt-to-GDP ratio.
Notably, both were revised upwards in the November 2023 Medium-Term Budget Policy Statement, as a weak global environment, and energy and infrastructure challenges weighed heavily upon the economy.
Consequently, the Treasury estimated that tax revenue would total R56.8 billion in 2023/2024, with a further R121.1bn shortfall over the next two years.
As a result, the forecast budget deficit has been revised from 4% in the 2023 Budget to 4.9%, while public debt as a percentage of gross domestic product (GDP) has been revised upwards to peak at 77.7% in 2025/26 rather than 73.6%, moving dangerously closer towards a debt trap.
This is a sharp increase from the 70.9% debt-to-GDP ratio seen in 2022/2023, and an even sharper incline from the 53.3% ratio seen in 2017/18, demonstrating the real impact of the pandemic era, and ongoing macroeconomic shocks and weaknesses.
South Africa’s economy is under enormous pressure and the Treasury must now walk a tightrope to strike a balance between the immense demands placed on the fiscus, the budget deficit and rising debt levels before these get out of hand.
If we do not take the necessary steps soon, we may end up on a road that leads to the door of the International Monetary Fund, asking for a bailout. This must be avoided at all costs. Now is the right time to rein in spending where possible, better manage our debt and cost to service obligations, and improve government’s revenue collection capacity.
Options to address the budget shortfall
Higher debt leads to weaker spending power, as debt servicing costs absorb a growing slice of the Budget. Rising debt levels are impacting what the government can spend on other crucial services such as health care, education, infrastructure development and national security.
South Africa must either reduce its debt obligations, which is difficult to do, given the vast need in our country, or increase its available income by stimulating economic growth and generating more tax revenue – also not an easy task.
If debt levels rise too high in any given country, that country may choose to enact certain austerity measure such as cutting spending to certain sectors or increasing tax. But as 2024 represents an important election year, and seeing as the economy and households are under strain, with tax rates close to their upper limits, I do not see an increase in taxes coming from the upcoming National Budget Speech.
Significant cuts to spending are also unlikely, as the government needs to continue spending in productive areas of the economy to create jobs, stimulate trade, encourage investment and, ultimately, grow our GDP. For example, to realise the country’s full growth potential, the government must continue to build and upgrade roads and bridges; improve and expand the country’s transport networks, and particularly our rail system; revitalise old city centres; provide bulk infrastructure to underdeveloped areas; and stabilise the energy grid.
A potentially compelling option that avoids cutting spending or raising taxes is simply to improve the government’s revenue collection capacity by further empowering the South African Revenue Service.
Improving Sars’s capacity to collect outstanding taxes, address tax evasion and non-compliance, streamlining tax collection processes to reduce operational costs, and giving it greater authority to crack down on tax-related crimes could add significantly to the country’s budget.
Another critical measure that should be considered is the consolidation of South Africa’s capital budgets and the conditional grants frameworks. A large number of capital budgets and grants, generally used for long-term investments into, for example, infrastructure projects or housing conditional grants, are controlled and granted by provincial and national departments with little or no collaboration or co-ordination. The should be consolidated and rationalised to ensure that funding is allocated to initiatives with the maximum potential economic impact, and that support those most in need.
The only certainty is that we will see the impacts of the upcoming elections upon the Budget. But the details remain uncertain, as the Treasury will need to come up with some surprises to balance the risks and ensure the strength of South Africa’s fiscal position and sustainability in the long term. There won’t be any easy answers, but there are potential options to consider, and there is reason for hope, as the National Treasury has successfully navigated many difficult roads before.
Dondo Mogajane is the CEO of Moti Group.
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