Stagnating economy, ballooning wage bill and struggling tax base – Godongwana’s Herculean task

President Cyril Ramaphosa prepares to deliver the 2024 State of The Nation Address at Cape Town City Hall on 8 February 2024. (Photo: Shelley Christians)

By Ed Stoddard and Neesa Moodley

18 Feb 2024

This week, attention will be focused on the Budget Speech, which will be delivered by Minister of Finance Enoch Godongwana on Wednesday, 21 February. It will have to be a delicate balancing act.

The elephant in the room is South Africa’s economic growth rate — and it’s anything but on a mammoth scale.

Most forecasts for South African growth for 2024 are pegged at between 1.0% and 1.5%. Growth is simply not brisk enough to make a dent in swelling levels of debt — unless the Treasury takes a chainsaw to spending, and that’s not going to happen in an election year.

Debt is measured as a percentage of GDP. Faster levels of growth bring that percentage down, while slower rates push it up. An economy growing at a clip of 5% typically translates into more profits for business and more employment, adding to the tax base. That, in turn, means the government can borrow less.

The difference between 5% and 1% is material on an elephantine scale.

Growth of 1% in South Africa’s economy is just in line with population growth, but the demographics of youth mean it is not fast enough to absorb new entrants into the labour market and expand the tax base.

“South Africa’s October Medium-Term Budget Policy Statement (MTBPS) growth forecast for 2023 was overly strong, at 0.8% year on year, with the outcome most likely to be 0.5% year on year, which will add to the upwards pressure on the gross loan debt-to-GDP ratio, not detract from it,” Investec chief economist Annabel Bishop said in a note on the Budget.

“For 2024, the MTBPS’s growth forecast is aligned to ours, at 1.0% year on year, but for 2025 the MTBPS’s 1.6% year on year is likely to prove too strong, given persistent load shedding, risking lifting the gross loan debt projection to GDP for 2025/26 too.”

For the current fiscal year, the 2023 budget forecast a debt-to-GDP ratio of 72.2%, which was revised up in the MTBPS to 74.7% of GDP.

“With the first three quarters of 2023/24 showing expenditure at 74.2% of budget, ahead of the 70.1% of the same period of 2022/23, and revenue at 71.5% of budget, under the 72.2% of the comparable period, a marked drop in the projected debt-to-GDP ratio for this year is unlikely,” Bishop noted.

Budget deficit

PwC projected a budget deficit — the gap between government spending and revenue — of 4.9% for the forthcoming 2024/25 financial year and sees that falling to 3.9% by 2026/27.

On the debt front, one vexed issue is the vast amounts that have been accumulated by malfunctioning state-owned enterprises.

“We expect that the minister will announce progress in the amount of debt that has been transferred and guaranteed, whether the conditions have been met, and what actions have been taken with regard to state-owned enterprises that are not meeting the set conditions,” PwC said.

First National Bank’s chief economist Mamello Matikinca-Ngwenya pointed out that spending pressures had surged, pushing expenditure beyond projections from the 2023 MTBPS and the 2023 Budget Review. Debt service costs have increased by 17.1% for the fiscal year-to-date, exceeding the 14.9% 2023 MTBPS estimate. Non-interest expenditure has also risen significantly by 6.3% for the fiscal year-to-date, reflecting evident expenditure pressures.

“These trends, including ongoing poor revenue performance, are poised to widen the fiscal balance deficit, surpassing the R330-billion envisaged in the 2023 MTBPS. We anticipate the fiscal deficit to be approximately 5% of GDP in 2023/24, compared with Treasury’s projection of 4.7%,” she said.

Speaking of expenditure, Associate Professor David Warneke, a partner at BDO South Africa, said it was almost a certainty that there would be a continuation of the Social Relief of Distress grant.

“Having already factored in an extension of the grant in the medium-term budget until March 2025, it is unlikely the minister will go back on this,” he said, adding that the grant — vital for about nine million South Africans — underscored the government’s commitment to supporting vulnerable segments of society, especially in an election year.

However, Warneke cautioned that with an annual price tag of about R44-billion, the grant’s long-term sustainability and impact on the national budget merited careful consideration.

Enormous wage bill

Public sector wages are a contentious issue and a considerable millstone weighing down the government’s budget. After announcing that public sector wage increases would be limited to 3.5% in last year’s budget, the government backtracked and pushed through an annual increase of 7.5%. This puts considerable pressure on an already stretched budget, when public servant remuneration is already the single largest component of government expenditure, gobbling up 30% of 2023’s R2.26-trillion budget.

“As we approach another election cycle, the government may seek to avoid negotiations and go directly ahead with proposing a modest increase of around 5% to 6% to appease public servants,” Warneke said. However, he noted that any increase was bound to raise concerns about the sustainability of the public wage bill, particularly when compared with international standards.

South Africa has one of the highest-paid public sectors in the world, with a total wage bill 3.5% higher than the average in countries that are part of the Organisation for Economic Cooperation and Development. This makes up about a third of total government expenditure and is not performance-based, meaning increases are applied across the board.

National Health Insurance

sona ramaphosa President Cyril Ramaphosa prepares to deliver the 2024 State of The Nation Address at Cape Town City Hall on 8 February 2024. (Photo: Shelley Christians)

During his recent State of the Nation Address, President Cyril Ramaphosa joked that he was “looking for a pen” to sign the controversial National Health Insurance (NHI) Bill into law. Ramaphosa said the government planned to “incrementally implement the NHI, dealing with issues like health system financing, the health workforce, medical products, vaccines and technologies, and health information systems”.

Although this sounds great in theory, the reality is that the NHI will require substantial budget allocations — and there has been little indication of where the funding will come from.

PwC noted that, similarly, the fate of state-owned enterprises remained uncertain, with discussions on mergers and closures ongoing.

“Any decisions must balance fiscal responsibility with the need to streamline operations and improve efficiency. Once again, given elections, it is doubtful that anything will be announced here as it might imply job cuts,” the PwC pre-Budget note said.

Taxing times

The two certainties in life are death and taxes. The question is, by how much will taxes increase? The minister of finance already warned in the MTBPS that there was a need to extract taxes worth another R15-billion.

Warneke said an increase would mean taking the risk of further burdening an already strained populace, which the minister may not want to do ahead of the polls. “Additional tax may also be extracted through less than full inflationary relief from bracket creep,” he said.

Revenue collections are widely expected to undershoot the 2023 budget estimates by R56-billion, on the back of declining corporate income taxes. Old Mutual’s head of tax, Nazrien Kader, suggested that the government could, in line with Economic Cooperation and Development recommendations, join international counterparts by introducing a 15% top-up tax. This is a global minimum tax of 15% payable by the ultimate holding companies of multinationals operating in South Africa.

But the decrease in corporate income tax suggested that tax collections through personal income tax and VAT collections would once again hold the fort, she said.

“In an election year, however, some would say it would be suicide to increase any new taxes.” Having said that, she noted that there were no expectations of any incentives or tax allowances for taxpayers.

Matikinca-Ngwenya said she expected the proposal of tax measures to raise additional revenue of R15-billion in 2024/25. This is expected to involve fiscal adjustments targeting middle- to high-income households, potentially including an increase in the general fuel levy. She cautioned that this could have a negative impact on cyclical growth. DM

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Business Maverick

Budget deficit

Enormous wage bill

National Health Insurance

Taxing times