The Treasury’s balancing act


By Chris Hattingh

“Over the next three years, the government will borrow an average of R553.7 billion per year.” The state will therefore have to borrow R1.5 billion per day.

This single fact best captures the various critical points that play into the 2023 medium-term budget policy statement, delivered on 1 November by Finance Minister Enoch Godongwana.

In a speech characterized by terms such as reprioritization, adaptation, identification of inefficiency and waste, and prioritization of reforms, the serious recognition of the country’s fiscal predicament stood like a pole above water.

Whether the rest of the government can be persuaded by this crisis to take the necessary steps forward remains to be seen – especially with national and provincial elections looming in 2024.

With debt servicing costs exceeding spending on the police service, the education sector and the health sector, Mr. Godongwana’s insight that “every additional Rand of revenue collected is one Rand less that we have to borrow” is particularly apt.

A noticeable drop in company tax income, especially from the mining industry, makes the treasury’s persistent efforts to balance spending with fiscal responsibility all the more difficult.

With the country’s risk premium steadily increasing over the past two years, it has also become more difficult for the government to raise funds by selling government bonds. In October, the average yield on government bonds reached 9.5%. Within this context, the Treasury now aims to increase domestic bond sales by 14% in the current financial year.

From R5.24 trillion in 2023/-24, public debt is expected to increase to R6.52 trillion in 2026/-27. An income deficit of R56.8 billion in the current financial year means that the treasury’s room for maneuver is all the more restricted – this within the wider context of a projected income deficit of R178.1 billion over the next three years from 2023/-24.

The budget deficit is now forecast at 4.9% of GDP (4% was estimated in the budget in February). Gross debt is now expected to exceed R6 trillion by the end of 2026. The February forecast for the debt-to-GDP ratio was 73.6% – this is expected to grow to 77.7% in 2025/- 26.

A crack of the whip can perhaps best be applied to Eskom in the South African fiscal context. That state-owned entity will not receive any additional bailout. In addition, the government’s R254 billion of debt relief loans will now be interest-bearing, rather than interest-free as previously indicated.

Provided municipalities comply with “set conditions”, municipal debts to Eskom will be written off over a three-year period.

Transnet will not (yet) receive assistance until it shows improvements. The entity’s new turnaround plan indicated a need for a cash injection of R47 billion, together with the government taking on R61 billion of its debt.

According to the medium-term budget, the logistics crisis has cost the economy up to 5% of GDP in 2022.

Social relief through emergency grant has been extended once again until 2024/-25, at a cost of R33.6 billion. The consolidation of this allowance could very well manifest itself in a new basic income allowance over the long term, without naming it as such.

The 2023/-24 wage increase remains protected, with additional funding of R24 billion allocated in 2023/-24, and R74 billion over the medium term.

The budget further indicates that government spending has exceeded revenue collection every year since 2008. Debt service costs are estimated at R385.9 billion in 2024/-25, and R455.9 billion in 2026/-27. This means that the government incurs new debt at a faster rate than it repays old debt. This indicates a public-sector debt spiral characterized by an ever-growing debt pile, which will become increasingly unmanageable, and threatens to crowd out government spending in other areas such as infrastructure, health and education.

The medium-term budget notably omitted any mention of the National Health Insurance, an as yet unaffordable but certainly an extremely expensive government project.

The external shocks of Covid-19, the Russian invasion of Ukraine, the end of a commodity boom, and most recently increased conflict between Israel and Hamas in the Middle East, must be seen in context here. If the government had followed pro-growth policies together with a more reasonable spending trajectory, today’s difficult decisions would not have been so immediate and sharp.

It should be highlighted that Mr. Godongwana emphasized the importance of economic growth. Some growth will be achieved with necessary but difficult reforms in electricity, logistics and labor markets. An element of desperation was evident in his speech, as Mr. Godongwana has repeatedly emphasized the need for electricity and logistics reforms. Those calls may fall on deaf ears.

The Treasury now expects South Africa’s GDP to grow by a paltry 0.8% this year (compared to the 0.9% predicted in the February budget) and by a weak average of 1.4% per year from 2024 to 2026. (1% in 2024, 1.6% in 2025 and 1.8% in 2026).

To unlock growth levels higher than 1%-2%, much more needs to be done than repairing electricity supply and logistics chains. This requires creating an environment conducive to substantive capital formation and investment, among other things by removing threats to property rights (such as expropriation without compensation), by restoring and strengthening the rule of law, and by the ability to deliver as the highest priority in public procurement and employment – ​​rather than political affiliation or racial transformation, as is currently the case.

Nevertheless, markets reacted positively to the medium-term budget, with the Rand strengthening from R18.72 to R18.60 against the dollar at the time of writing.

  • Chris Hattingh is a senior policy analyst at the Center For Risk Analysis (CRA).