Godongwana faces another R40 billion hole

 ·15 Feb 2024

Economists at Nedbank say that the 2024 Budget speech on 21 February is unlikely to deviate too much from what most in South Africa already know – but tax revenues could fall R40 billion short of the Treasury’s expectations just three months ago.

In a pre-budget analysis on Thursday (15 February), the finance group noted that the speech and tabled budget will likely show that economic conditions are broadly the same as at the time of the November Medium Term Budget Policy Statement (MTBPS).

That is to say, things do not look great for South Africa.

The group said that conditions are generally unsupportive of fiscal consolidation (ie, cutting government spending), which will likely complicate the unenviable task of finance minister Enoch Godongwana to reduce the growing budget deficit and contain the “relentless rise” in public debt.

“Persistent load shedding, worsening transport bottlenecks, soft global demand and subdued commodity prices will hurt production and exports, while high domestic interest rates and the challenging operating environment will continue to weigh on consumer spending and fixed investment,” the bank said.

The economists said that the National Treasury already accounted for much of these adverse conditions in the MTBPS, so “we do not expect significant changes to the GDP and inflation forecasts for the next three years”.

However, the bank’s modelling and estimates suggest that Treasury more than likely underestimated the impact of the weaker economy on tax revenue, they said.

“Sharply lower company taxes, mainly due to dwindling mining profits on the back of falling commodity prices and elevated operational costs, hit aggregate revenue growth hard in 2023/24.

“We estimate that gross tax revenue in 2023/24 will be R94.8 billion less than the Budget 2023 estimate and R38 billion lower than the MTBPS 2023 figure,” the group said.

The bank estimates that consolidated revenue in 2023/24 will be R53.1 billion below the February 2023 estimate, more than the National Treasury’s projected R43.4 billion shortfall in the MTBPS.

Despite the shortfall, the economists said that the National Treasury’s quest to raise an additional R15 billion in 2024/25 is not likely to result in significant hikes in tax rates, with the additional revenue raised from below-inflation adjustments to the personal income brackets.

With revenues under pressure, Nedbank anticipates government expenditure to also move in the wrong direction.

Aggregate spending for 2023/24 was up by almost 8% year-on-year, it said – well ahead of the MTBPS and the Budget 2023 projections.

“The pressure came from the higher-than-expected public sector wage settlements and surging debt service costs. In 2024/25, the National Treasury will probably continue to reflect its commitment to expenditure restraint by restricting the increase in expenditure to around the projected inflation rate for the next three years,” it said.

In the MTBPS 2023, the National Treasury reaffirmed that the space for additional spending was non-existent, with the postponement of the mooted Basic Income Grant, through another extension of the limited Social Relief of Distress (SRD) grant, confirming the precarious fiscal position.

“Therefore, social grants will continue to be adjusted below the inflation rate,” the group said.

This comes even as president Cyril Ramaphosa promised to “extend and expand” the SRD grant during his State of the Nation Address. The president also talked up the signing of the National Health Insurance Bill (NHI) into law.

On this front, Nedbank said that it does not expect any new funding for implementing the NHI to show up in the budget.

However, it does expect more financial assistance to be announced for embattled ports and rail company, Transnet.

With revenue expected to come down and expenditure going up, Nedbank said that the consolidated budget deficit for 2023/24 is now expected to rise to about 5.4% of GDP – only narrowing to 5.2% in 2024/25 and only recording a surplus from 2025/26 – a year later than estimated in the MTBPS 2023.

Read: South Africa may have to crack open the vault

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