Medium-Term Budget 2024 – what South Africans should expect

South Africa’s improved revenue collection, the potential for a smaller budget deficit and inflation changes will likely be key parts of the upcoming mini-budget, but infrastructure issues and global risks could still impact economic growth.

The Minister of Finance, Enoch Godongwana, will table the Medium-Term Budget Policy Statement (MTBPS) in Parliament on Wednesday, 30 October.

The MTBPS outlines government policy goals, forecasts the economic outlook, and sets spending and revenue plans for the next three years.

In the latest episode of the No Ordinary Wednesday podcast, Investec Chief Economist Annabel Bishop discusses the Finance Minister’s priorities ahead of the mini-budget on 30 October.

“I think we have a bit of good news this year,” Bishop said. “Or certainly, perhaps not bad news like last year.”

“Last year, we had a collapse in global commodity prices, which, combined with our freight crisis, saw revenue collection drop quite substantially.”

“In other words, they were actually only at 37.5% of the budget estimate by August 2023.”

However, Bishoip said that in the year since, there has been an improvement in revenue collections, which creates room for the country’s budget deficit to become significantly smaller.

A of August 2024, revenue collection has improved to 42.4%, closely matching expenditure, which is at 43%. “So it looks like we’re not going to have a big fiscal deficit.”

“It looks like the deficit is going to be at about R152 billion, instead of the R237 billion which we experienced last year for this period.”

Initially, the budget deficit was projected at 4.5% of GDP for this year, but it could now be revised down to around 4%, and even further to 3.7% next year, with hopes of reaching 3.3% the following year.

Bishop explained that these figures could be improved even further. “In other words, we really do seem to be in a stronger government finance environment.”

“So, overall, for the fiscal year as a whole, the fiscal deficits could come in below R350 billion. And, of course, this is good news.”

This means that the government will have a bit of leeway, she explained, which could be used to either reduce the borrowing projection or moderate the fiscal deficit.

The improved revenue means the government won’t need to borrow as much as before, Bishop said.

Last year, with less revenue, borrowing increased, pushing the debt-to-GDP ratio towards 80%.

But now, with better revenue and lower borrowing costs due to falling bond yields, there’s less pressure on borrowing.

The government has also been using savings to reduce debt, and the situation looks much better than it did a year ago.

“But another interesting point that the minister made is that they’re looking to curb expenditure.”

“In other words, they’re looking to try and bring in cost-cutting measures to really make an effort at fiscal consolidation.”

South Africa has also seen a substantial drop in bond yields this year.

“After the election, we’ve actually seen bond yields that were over 12% drop down towards 10%. Now, of course, this reduces the borrowing costs for South Africa in terms of its debt issuance and is another area of savings.”

However, Bishop cautioned that while South Africa is moving in the right direction, it is still early in the financial year, and many risks remain.

While the business-government partnership hopes to reach 3.3% GDP growth next year, this goal won’t be achievable unless major infrastructure problems – particularly with logistics and the ongoing freight crisis at Transnet – are addressed.

Additionally, rising geopolitical tensions could worsen the situation, especially if oil prices increase significantly due to potential disruptions like strikes on Iranian oil fields.

“Now that obviously could be a negative for South Africa. If that happens, it would reduce oil supply,” she said.

There’s also the possibility of lower global demand, which could further weaken commodity prices and negatively impact government revenues.

“Another clear point as well that we need to always bear in mind is that government debt is supposed to be only around 60% or less as a ratio to GDP to put us in line with other emerging markets.”

“And, of course, sitting at close to 75%, that puts us significantly away from what is deemed to be sustainable. So there are still risks and of course, pressures are going to come from the wage negotiations as usual as well.”

“South Africa continues to face substantial spending pressures and the economy is still underperforming,” Bishop added.

However, if the economy strengthens next year and GDP growth moves toward 3%, this could boost revenue in the longer term.

“But we obviously are still sitting in a weak year for 2024.”

Tax changes

Bishop explained that while there likely won’t be any tax changes in the October budget, there could be an indication of what will happen tax-wise in February.

The weakness of the economy, paired with the substantial revenue improvement both mean that major tax changes probably won’t be necessary.

“With the interest rate cuts that we are going to experience going forward into next year and the remainder of this year, that obviously will be helpful for consumers.”

“And government should benefit from the taxation coming through from the two-pot retirement system.”

The vast number of applications coming from retirement withdrawals should give the government coffers a decent boost, she said.

“But I think also what’s quite important to note for South Africa is that we are already quite heavily taxed if you look at other emerging market economies, and that has been one of the reasons why we’ve had weaker growth over the past decade.”

“In fact, in the 2000s, we had much stronger economic growth when tax ratios were lower.”

“So these are all areas that they, the government will consider.”

With the government indicating that the tax buoyancy ratio is very weak, Bishop said that tax changes in the near future are unlikely.

Inflation changes

Importantly, the mini-budget, unlike the main budget, also addresses the inflation target.

The Reserve Bank has commented that they believe the inflation target should be lowered, and it is likely that there will be information about this.

“So we expect that they would look to lower the inflation target from 4.5% to potentially 4% now,” Bishop said.

Currently, South Africa’s inflation target range is 3% to 6%. When inflation targeting was introduced in the early 2000s, former Minister Tito Mboweni expressed a desire for it to be as low as 2%, which aligns with the targets of our trading partners.

“So we think that’s the ultimate goal of the Reserve Bank: continue to bring down the inflation target.”

She explained that a few years ago, the target was shifted from a range of 3% to 6% to a specific point of 4.5%. Now, inflation must be at that level, not just within the range.

Governor Lesetja Kganyago has mentioned that with inflation expected to drop below 4% by the end of this year and average under 4.5% next year, it could be a good time to lower the target.

“Of course, lower inflation is very good for consumers. Ultimately, it means you have lower real interest rates as well, and, of course, that does tend to be beneficial for the economy.”

“So I think these are two areas we could look out for in the MTBS,” Bishop said.

Read: The tax crippling a critical industry in South Africa – that some want even higher