After yesterday’s Medium-Term Budget Policy Statement (MTBPS), there are glimmers of hope, particularly with the achievement of a budget surplus and a reduction in the wage bill. Despite these positive strides, it is clear that South Africans will have to navigate financial pressures for a while longer.
The MTBPS provides a mid-year update on South Africa’s fiscal performance, assessing how current revenue and expenditure align with the budget targets set in February, while outlining the government’s priorities for the next three years.
Finance Minister Enoch Godongwana (pictured) highlighted that economic reforms are starting to yield results, noting improvements in electricity supply, stabilised logistics, and reduced business costs.
However, National Treasury forecasts a modest economic growth rate of 1.1% for the current fiscal year, down from the 1.3% projected in February. Over the next three years, GDP growth is anticipated to average 1.8%, significantly lagging behind the global growth forecast of 3.2% for 2024 and 2025.
Interestingly, Treasury has also outlined an “upside scenario” where economic growth could exceed 2% starting in 2025, which would bolster productivity, enhance confidence, and reduce the sovereign risk premium. In this scenario, South Africa’s economy might see a growth rate of 2.8% in 2025, compared to the baseline estimate of 1.7%.
The government has revised its total revenue expectations to R1.79 trillion for the current fiscal year, with expenditure set at R2.2 trillion, which includes R388.9 billion allocated for debt servicing. The main budget deficit is projected to decrease from 4.7% of GDP this year to 3.4% by 2027/28, while debt is expected to stabilise at 75.5% of GDP by 2025/26.
Throughout this fiscal adjustment, the minister emphasised the commitment to safeguarding critical services such as social relief, managing the public service wage bill, and restricting bailouts for state-owned entities.
Gross tax revenue for the year is projected to fall R22.3bn short of February’s estimates, primarily driven by declines in import duties and fuel levies. However, corporate profits are expected to rebound over the medium term, bolstering corporate tax collection alongside ongoing enhancements in tax compliance and administration.
In terms of non-interest expenditure, the government anticipates a rise of R10.4bn compared to the February Budget. This increase is largely attributed to the repayment of the South African National Roads Agency’s e-toll debt and the costs associated with troop deployments to the Democratic Republic of Congo.
Sanlam Investments chief economist Arthur Kamp says overall, there were not that many surprises.
The government is still looking to do fiscal consolidation over the medium term to stabilise and reduce the debt ratio to make this fiscal policy sustainable.
However, Kamp says South Africa is slowly but surely moving in the right direction.
“The key thing, though, is we have to deliver on our infrastructure and our overall economic reforms to make the economy grow faster. If we managed to do that, that would help towards stabilising the debt ratio and keeping fiscal policy sustainable.”
Debt ratio
Kamp explains that the debt ratio gives an idea of whether the country is moving towards a more sustainable fiscal position.
“The good news is that the budget does show a peak in the debt ratio next year at 75.5% of GDP, and then slightly down in the following two fiscal years.”
He adds that the debt trajectory, however, has lifted a bit compared to the previous projection in February.
“The reason for that is we’ve had a bit of a slippage on the main budget deficit. We’re looking at 4.7% of GDP this year, rather than 4.3% of GDP projected in February.”
He says the reason for that is the shortfall in tax collections.
“This despite the fact that individuals were not compensated for bracket creep in the current fiscal year, costing around R16.3bn to individuals. And of course, even if there is a full adjustment for inflation in the next fiscal years, there’s still a carry-through effect of about R17.3bn next year and R18.6bn the year thereafter. But despite that, we’ve had this tax shortfall, also a little bit of overspending on non-interest spending of about just over R10bn. However, in the medium term, that deficit does come down to 3.4% of GDP.”
He says the key thing to watch is the primary budget balance, which is revenue less non-interest spending. It is projected to improve from a surplus of 0.4% of GDP this year to 1.8% of GDP by 2027/28, and this is what has helped to stabilise the debt ratio.
Economic growth – what this means for consumers
Jurgen Eckmann, wealth manager at Consult by Momentum, says although there were some green shoots of hope outlined in the MTBPS – such as the relief in interest rates and loadshedding – the outlook for economic growth remains low, with the government anticipating a real GDP growth of 1.1% in 2024, which is below the already-low estimate of 1.3% in February.
“The government is walking a tightrope: it knows that it needs to rein in spending and manage its debt, but it must still allocate funds to vital areas to drive growth,” says Eckmann.
He notes the hot potatoes remain the public sector wage bill, the Social Relief of Distress (SRD) grant, and National Health Insurance (NHI), which the government is under political pressure to deliver.
“Yet, as highlighted by the finance minister, tax revenue collection remains a pain point. This is likely partly why these aspects were skimmed over in the finance minister’s speech – except for the minister indicating that expenditure for this year will increase for the SRD grants when compared to the February estimates, and that digitisation of health records to support the roll-out of the NHI would be a priority.”
Weighing in on the public sector wage bill, Citadel’s chief economist, Maarten Ackerman, says it remains the big elephant in the room. South Africa ranks third highest in the world at about 14% of GDP, whereas the global average is only 10%.
“They also made the point that we are much higher than the rest of the world on general government employment levels, so it is good news to hear that the government is offering about 30 000 public servants early retirement packages. In the short term, unfortunately, it feeds into the government’s high debt (at a cost of R11bn), but we appreciate that it is a difficult task and at least they are taking big steps to lower the wage bill.”
Nkosinathi Mahlangu, youth employment portfolio head at Momentum Group, says the minister’s early retirement proposal to make way for youth in the workplace sounds promising.
“But it is going to be interesting to see how this will play out practically, especially given that only a tiny percentage of South Africans have enough retirement savings to retire comfortably.”
Four growth pillars
Over the medium term, growth was forecast to average 1.8%, with the best-case scenario being 2.5% and worst-case scenario potentially at 0.5%. To improve the situation and achieve higher inclusive growth, Godongwana said the country needs to focus on four growth pillars: macroeconomic stability, structural reforms, growth-enhancing infrastructure, and improved state capability.
Ackerman believes that economic growth reform was “contingent on structural reforms”. He says expanded infrastructure spending does bring some good news.
“Infrastructure spending is always a great injection into the economy,” Ackerman says. “Half of what we are spending on is needed, like improving our ports and rail system. But there is more we need to do in terms of structural reforms to get the economy back to capacity growth. This is why it was good news today to see that Project Vulindlela added three new items to its second phase, including smart cities, digital public infrastructure and strengthening local government’s ability to deliver basic services.”
Mahlangu notes that while Treasury’s plans to ramp up infrastructure development are welcome, he would eventually hope to see a plan tabled that would detail the percentage of unemployed youth to be recruited, who would support skilled and experienced labour to roll-out these proposed programmes.
“This is in line with the president’s statement several months ago, where he recommended that work experience should be removed as a requirement for young candidates who want to work in the public sector.”
Mahlangu adds that this focus on infrastructure could also unlock opportunities for new SME entrants in the construction space.
“From a socio-economic perspective, while the global conflicts and geopolitical tensions pose a risk to South Africa’s macroeconomic stability, this uncertainty could pave the way for increased trading within the continent, which could even be ring-fenced to bolster qualifying SMEs and specific sectors.”
Arno Jansen van Vuuren, managing director at Futurewise, an education insurance provider, notes the speech was thin on any plans to increase resourcing for education, except that it would protect the social wage.
However, he says the government can be commended on the strides it has made in the primary surplus, which will contribute to its goal of making state debt-servicing costs more manageable.
“This will hopefully give the government a bit more wiggle room to invest in vital institutions like education as proposed in previous budgets, so we’re optimistic that more measures will be outlined to encourage this in the 2025 Budget Speech,” says Van Vuuren.
Future outlook – GNU
The 2024 MTBPS was presented amid a moderately improved economic outlook and the establishment of the Government of National Unity (GNU), which has pledged its commitment to prudent fiscal policy aimed at stabilising debt. Notably, this formed the GNU’s first comprehensive fiscal policy statement just over 100 days into its tenure.
Casey Sprake, an investment analyst at Anchor Capital, says the major risks are largely unchanged since the 2023 MTBPS, “including lower revenue growth due to anaemic economic growth, a higher-than-anticipated public-service wage settlement, and increased borrowing costs driven by a prolonged high-risk premium”.
Sprake adds that persistent deficits and accumulating liabilities in other areas of the public sector, such as SOEs, further present risks that may lead to increased demands for budgetary support.
“Overall, the MTBPS serves as a reality check for those with unwavering optimism regarding the GNU. Debt projections have risen modestly, reflecting lower tax collections and increased spending. While the figures themselves are not overly concerning, and the budget appears credible, there is a growing concern about how this may impact the positive reform narrative fostered since the inception of the GNU,” she says.
