Social unrest warning for South Africa ahead of mid-term budget

South Africa is in an unsustainable financial position, but Finance Minister Enoch Godongwana cutting expenditure too far could have serious implications for South Africa’s stability.

The worse-than-expected GDP will likely raise the budget deficit far higher than the National Treasury’s initial forecasts.

“For 2023/24, we expect a shortfall in taxes of around R47 billion accompanied by a higher expenditure of R56 billion, pushing the deficit to 5.5% of GDP. The outcome is markedly higher than the National Treasury’s target of 4%,” economists at Nedbank said.

“The commodity price upcycle, which led to a windfall in tax revenues last year, has turned sharply, significantly reducing corporate tax collections.”

In addition, the government’s expenditure has been far greater than what was pencilled in the initial 2023 budget, driven by a higher-than-expected wage hike of 7.5%.

Amidst this, Keith Naidoo, General Manager at Consult by Momentum, said that there is no room for any tax cuts in the Medium Term Budget Policy Statement (MTBPS), which Godongwana will announce tomorrow, 1 November.

“Aside from the accumulative contingency reserve and allocated reserve funds of R95.2 billion between FY2023/24 and FY2025/26, which could cater for part of the expected expenditure overrun, the government has proposed a public sector headcount freeze, alongside the potential for outright job cuts and a halt in advertising new procurement contracts for all infrastructure projects, to address the shortfall in revenue collections,” Momentum Investments economists said.

However, Momentum warned that too much austerity could have dire consequences for South Africa.

“With real government spending in per capita terms stagnating over the past decade, proposed austerity measures are likely to weigh more heavily on the fragile social fabric of the country. This risks an elevation in service delivery protests in the medium to longer term, in our opinion,” Momentum said.

Other elements of the MTBPS

Looking elsewhere, Naidoo said that there is a large chance that the government will need to give bailouts to both Eskom and Transnet.

This is especially the case for Transnet, which has recorded a poor financial performance, as it now contends with a leadership exodus.

“The market consensus view is for T-bill issuance to play a significant role in financing the larger-than-anticipated budget deficit given the steepness of the yield curve, making T-bills a cheaper funding source relative to fixed-rate, longer-dated government bonds,” Momentum said.

In addition, despite next year being an election year, Naidoo said that it is unlikely that there will be any significant announcements regarding the Social Relief of Distress (SRD) grant.

Updates over the SRD grant will likely only be addressed during next year’s National Budget Speech.

“However, after the SRD grant lapses in March 2024, we do anticipate that it will continue in the form of a basic income grant to those living below the poverty line,” Naidoo said.

Finally, although the “end” of e-tolls was announced in last year’s MTBPS, it is unlikely that there will be any updates on the process of their closure.

“I suspect that it won’t be mentioned – but at the same time, we may be surprised. A great deal more detail is needed on government’s plans for the future,” Naidoo added.

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