South African National Budget 2024/2025

Against a backdrop of formidable economic challenges, SA’s Minister of Finance, Enoch Godongwana, unveiled his third National Budget for 2024. Considering a landscape marked by high unemployment, weak confidence levels, and pressing infrastructure issues, the Minister navigated a complex fiscal terrain to address the country’s economic woes. With a cautious optimism for growth and a strategic focus on fiscal consolidation, the Budget sets the stage for critical discussions on sustainable economic recovery and long-term structural reforms in the nation.

Kevin Lings

Chief Economist

Victor Mphaphuli

Head: Fixed Income

Tarryn Sankar

Head of Credit: Fixed Income

Key takeouts

Economic Challenges: The macro-economic environment in SA remains extremely challenging, with high unemployment, weak consumer and business confidence, low fixed investment, elevated interest rates, and infrastructure issues like electricity outages and disruptions to port and rail capacity.
Economic Growth Outlook: Despite the challenges, the economy is expected to grow by 1.3% in 2024, gradually increasing to 1.8% in 2026. Factors contributing to this growth include reduced load shedding, lower interest rates, increased spending associated with the 2024 National Election, improved agricultural season, and recovery in international tourism.
Budget Numbers: The Budget balance for the 2024/2025 fiscal year is projected to improve slightly to -4.5% of GDP, with a continued improvement expected in the following years. The Minister aims to adhere to fiscal discipline over the medium term but acknowledges it will take time to reach a sustainable debt level.
Revenue Challenges: Tax revenue underperformed in 2023/2024, mainly due to shortfalls in corporate income tax, VAT, and excise duties. While personal income tax collection exceeded expectations, the overall revenue outlook remains concerning over the medium term.
Expenditure Focus: Government expenditure increased in 2023/2024, driven by rising salary costs and debt service payments. Efforts to contain salary increases and manage expenditure are crucial, alongside initiatives like the social relief grant extension and debt relief for municipalities.

Listen to our podcasts below

Minister of Finance delivers a positive Budget 2024 for bond investors

STANLIB’s Head of Fixed Income, Victor Mphaphuli, remarked that Budget 2024 turned out to be more positive than what bond markets had anticipated. Despite concerns that the 2023/2024 main Budget deficit might spike to 5% due to lower-than-expected revenue and increased spending, it will remain unchanged at 4.7%. The market also reacted positively to the proposed introduction of binding fiscal anchors.

Budget 2024: ratings agencies will welcome moves to stabilise SA’s debt

STANLIB’s Head of Credit, Tarryn Sankar, and Chief Economist, Kevin Lings, discuss how rating agencies will view the government’s careful measures to tap R150 billion from the Gold and Foreign Exchange Currency Reserve Account. They also note the Minister’s firm stance on bailing out state-owned entities such as Transnet.

The MTBPS may change credit outlook but not cause a rating downgrade

In this podcast, STANLIB’s Chief Economist, Kevin Lings, emphasises the most important points of Budget 2024, focusing on the government’s choice to access R150 billion from the R500 billion surplus in the Gold and Foreign Exchange Currency Reserve Account (GFECRA) to decrease debt. Although this move has pleased bond market investors, Kevin argues that a better use for the funds would be to stimulate economic growth. Listen to the podcast for more insights.

Key economic considerations of Budget 2024

The South African Minister of Finance, Enoch Godongwana, delivered his third National Budget on Wednesday, 21 February 2024. He was appointed as Minister of Finance in August 2021.

Unfortunately, SA’s macro-economic environment remains extremely challenging. This is reflected in a range of social and economic factors, including extremely high unemployment, weak consumer and business confidence, low fixed investment, elevated interest rates, and failing infrastructure (particularly the persistent electricity outages and disruptions to port and rail capacity). The country’s low growth rate severely limits the Minister’s policy choices, especially given the need to support the large number of unemployed individuals, alleviate a widening array of infrastructural challenges, assist a household sector that has experienced a real decline in disposable incomes over the past year, attract and retain foreign investment and avoid any further credit rating downgrades.

Fortunately, the economy is expected to grow by a slightly more encouraging 1.3% in 2024, rising to 1.6% by 2025 and 1.8% in 2026, helped by a scaling back/elimination of load shedding in 2024/2025, a reduction in interest rates in the second half of 2024 and into 2025, increased spending associated with the 2024 National Election, an improved summer agricultural season, a solid recovery in international tourism, and ongoing fixed investment in the energy sector.

Still, a growth rate of 1% to 2% is still well below the rate required to inspire a broad-based increase in private sector fixed investment and widespread job creation – highlighting the need for long-term structural economic reforms (principally the deregulation of the private sector and far greater use of private-public partnerships) and effective policy implementation.

The 2024/2025 Budget numbers

For the 2024/2025 fiscal year, the Minister of Finance announced that the Budget balance is projected to improve slightly to -4.5% of GDP, up from a revised -4.9% of GDP in 2023/2024 (revised from -4% in the 2023 Budget). Crucially, in 2025/2026 the fiscal deficit is expected to continue to improve, dropping to -3.7% of GDP, before reaching an acceptable -3.3% of GDP in 2026/2027. While a large part of these projections is driven by government accessing the funds in the Gold and Foreign Exchange Contingency Reserve Account (GFECRA), they confirm that the Minister intends to adhere to fiscal discipline over the medium term. However, he acknowledged that it would still take several years before the level of government debt is at a comfortable and sustainable level.

The Minister also highlighted that National Treasury expects to be able to achieve a primary Budget surplus (the Budget deficit less interest costs) in 2023/2024, the current fiscal year, and then sustain a primary surplus for the foreseeable future. This would be the first time since 2008/2009 that government revenue exceeds non-interest expenditure.

Government’s projected economic upswing over the next three years will, hopefully, make it easier to achieve its budgeted level of fiscal consolidation. Unfortunately, it should be noted that in previous years government persistently aimed to reduce the Budget deficit to below -4% of GDP on a sustained basis, as well as achieve and sustain a primary Budget surplus, but was unable to do so. The main reasons were weak economic growth and an inability to rein in government expenditure, especially consumption spending and salary expenses.

Investors need to be mindful of two risks. The first is that government’s revenue projections might be difficult to achieved in a low growth environment and the second is that government has budgeted for a modest increase in expenditure, which will be challenging to achieve in an election year.

Given central government’s and state-owned entities’ current balance sheet constraints, economic policy will have to increasingly focus on the role of the private sector in driving economic growth. We hope this includes a greater reliance on private-public partnerships as a means of lifting fixed investment spending. At this stage, National Treasury envisages fixed investment growing by 3.7% in 2024 and improving to 4% in 2025 before stabilising at 3.6% in 2026.

The revenue side of the Budget

In 2023/2024, tax revenue underperformed budget by R56.1 billion. This means that total revenue increased by a modest 2.6% year-on-year, well below the budgeted increase of 6%. This underperformance follows an outperformance of R93.7 billion in 2022/2023 and R198.5 billion in 2021/2022.

In addition, this underperformance was better than projected in the October 2023 Medium-Term Budget Policy Statement (MTBPS), when National Treasury expected to underperform budget by R56.8 billion (resulting in a R700 million upward revision).

A breakdown of the 2023/2024 tax revenue shortfall highlights that it has mainly arisen from a shortfall in corporate income tax, VAT and excise duties. Corporate income tax, in particular, declined by a significant -12.6% y/y compared with the projected growth of -2.5% in the February 2023 Budget, amid a significant decline in mining provisional corporate tax collections. This translates into a shortfall of R34.8 billion, accounting for 61.9% of the overall undercollection. In addition, VAT collection has been disappointing, as stronger-than-expected VAT refund payments offset strong import and domestic VAT collections. VAT receipts grew by only 5.4%, representing a R26.1 billion shortfall relative to the February 2023 Budget.

Positively, personal income tax (PIT) collection was ahead of budget: it grew by 8.2% in 2023/2024. According to National Treasury, this was driven by a recovery in earnings and higher bonus payments, particularly in the financial sector.

Unfortunately, over the medium term, government’s revenue expectations are concerning, with the outlook for most major tax categories being revised lower. While collections are expected to increase to R1.86 trillion in 2024/2025 and R1.99 trillion in 2025/2026, these are a combined R96.9 billion below the projections presented in the February 2023 Budget.

Fortunately, for the 2024/2025 budget period, the Minister avoided any major surprise tax adjustments. However, he did not provide any tax relief for households, deciding not to adjust the income tax brackets, rebates and medical tax credits for inflation, to allow for fiscal drag. This will provide government with an additional R18.2 billion in tax revenue. While the lack of relief from fiscal drag was expected, the impact on the household sector is meaningful and will add to the strain many households are currently experiencing.

Positively, the general fuel levy and Road Accident Fund levy will not be increased. The customs and excise levy will also remain unchanged. This will be partially offset by above-inflation increases in the usual array of excise duties, especially on alcohol and certain categories of tobacco products, providing the government with an additional R800 million in tax revenue. The minister increased excise duties on alcohol by between 6.7% and 7.2% while excise duties on cigarettes and pipe tobacco and cigars will increase by 4.7% and 8.2% respectively.

In addition, two long-term tax policy reforms – the two-pot retirement system and the global minimum corporate tax rate – will be implemented in 2024/2025. Those should help to improve government’s tax collection in the medium term. The introduction of global minimum tax rules is expected to increase corporate tax collection by R8 billion in 2026/2027.

Government estimates that R5 billion in PIT can be raised in 2024/2025, as fund members access once-off withdrawals due to the implementation of the two-pot retirement system. This is based on a conservative assumption that R26 billion will be withdrawn from retirement funds.

As mentioned above, for 2024/2025 the Minister intends to collect R1.86 trillion in tax revenue, which is an increase of 7.6% over 2023/2024. While this appears largely achievable given the tax changes in personal income tax, it implies a tax buoyancy of 1.33, significantly above the long-term average. Significant risks surround government’s tax collection projections over the medium term, given sluggish economic growth projections, with gross tax revenue growth projected to average 7.2% for the three years to 2026/2027.

It is abundantly clear that without a sustained increase in economic growth accompanied by an increase in employment and an improvement in tax morality, the government may struggle to meet its revenue targets. Without higher economic growth, tax collection will continue to dwindle, scuppering government’s attempts to meet its social economic objectives.

The expenditure side of the Budget

In 2023/2024, government expenditure was R2.27 trillion, which is R26.3 billion more than budgeted, largely as a result of increased salary costs and debt service payments. Although the Minister announced a more ambitious fiscal consolidation initiative in the October 2023 MTBPS, the government was unable to achieve the desired outcome in the second half of the fiscal year.

Unsurprisingly, government’s expenditure projections for the next three years remain relatively conservative but will be challenging to achieve. In 2024/2025 government is budgeting to spend R2.37 trillion, which is a modest rise (4.4%) considering that over the past five years government expenditure has increased by an annual average of around 6.7%. The bulk of government’s spending is still allocated to education at R474.87 billion or 20.1% of total expenditure, followed by social protection at R395.46 billion (16.7% of expenditure) and healthcare at R267.23 billion (11.3% of expenditure).

One of the fastest-growing areas of government spending remains debt servicing costs, which are projected at 16.2% of total expenditure in 2024/2025, up from 11.3% as recently as 2019/2020.

Unfortunately, there are still not enough measures in the Budget to directly promote job creation, although it shows that government is continuing on its path of fiscal consolidation by endeavouring to ensure that the growth in expenditure is modest.

The Minister of Finance has extended the social relief of distress (SRD) grant of R350 a month for another year until March 2025. The grant currently benefits 9.02 million people and costs taxpayers R33.9 billion. In addition, a provisional allocation of R71.9 billion has been set aside for the SRD grant over the medium term, pending a comprehensive review of the entire social grant system. These payments are over and above the existing social security grants. Currently 18.8 million South Africans receive a social grant, about 31% of the population. Importantly, a permanent extension of the Covid-19 SRD grant, or a similar new grant, needs to be matched by a corresponding permanent increase in revenue, decrease in spending or combination of the two.

Adjustments to the public sector wage bill

Government’s intention to contain salary increases remains a key focus area. Over the last 10 years, compensation of public sector employees has become one of the largest components of government spending. In 2018/2019 this accounted for a substantial 35.6% of total consolidated expenditure, but this has decreased to 31.8% in 2023/2024, and is expected to remain stable in 2026/2027.

While it is moving in the right direction, SA’s wage cost remains exceptionally high by international standards. Although the Minister has outlined government’s intention to control salary expenses, it is unclear whether this plan can be achieved – especially given the pushback from the major public sector trade unions. The wage bill is projected to grow by 4.5% on average over the medium term, marginally below the 4.6% average inflation for the period. Despite being largely in line with inflation, wage increases continue to represent one of the biggest risks to National Treasury’s expenditure projections.

In terms of SOEs, Transnet was granted a guarantee of R47 billion in 2023/2024 to meet its borrowing requirements. However, the use of this guarantee is conditional on the implementation of a comprehensive turnaround plan that includes focusing on its core activities and introducing private sector partnerships.

The Minister also provided an update on Eskom’s bail-out. Government will transfer R76 billion and R64.2 billion to Eskom in 2023/2024 and 2024/2025 respectively. Transfers in each of these years are R2 billion lower than projected because of the entity’s failure to conclude the disposal of the Eskom Finance Company, as stipulated in the debt-relief conditions. In 2025/2026, government will transfer R40.2 billion to Eskom. In the same year, government will take over a maximum of R70 billion of Eskom’s debt by switching selected debt instruments into government debt.

Interestingly, government did not propose any additional allocations to other SOEs. This is encouraging, as it shows National Treasury is taking a hardline approach towards SOEs overall, insisting that they restructure before any funds are allocated. On the other hand, most of these SOEs are in serious financial difficulty and will probably need government assistance sooner or later. By not implementing a more significant financial restructuring of SOEs, the Minister risks delaying the inevitable, and pushing the problem down the road.

SA’s fiscal deficit remains uncomfortably high

The R56.1 billion tax revenue shortfall in 2023/2024 forced the Minister of Finance to present a noticeable deterioration in SA’s key fiscal parameters. National Treasury has revealed that the fiscal deficit for 2023/2024 amounted to 4.9% of GDP, which is up from 4% at the time of the February 2023 Budget. This means that gross government debt will increase to 73.9% of GDP for 2023/2024 from 72.2% at the time of the 2023 Budget. Government debt is expected to increase further over the next few years, peaking at 75.3% of GDP by 2025/2026, while debt service costs will rise to 21.1% of main Budget revenue by 2026/2027. The risks to government finances are, unfortunately, firmly to the downside until the various initiatives to embed fiscal discipline and lift economic growth are more fully achieved.

Although the Minister has previously highlighted that government has too many departments and work needs to be done to reconfigure the size and structure of the state by consolidating government departments, entities and programmes, very little has been achieved.

In 2016, Minister Pravin Gordhan made the point that “the quality of government spending needs to be improved. Too much public spending is regarded as wasteful, too much is ineffectively targeted and too little represents value for money.” Minister Gordhan stressed that “fiscal resources do not match long-term policy aspirations”. Since then, government’s policy aspirations have increased, while the fiscal resources have deteriorated, limiting government’s ability to close the gap between policy intention and enactment.

More encouragingly, the Minister indicated that 72 municipalities had applied for debt relief for the debt they owe Eskom by December 2023. This represents 96.9% of the total debt owed to Eskom by municipalities at March 2023, showing their commitment to improve their finances. 70 applications totalling R55.2 billion had been approved at January 2024.

Debt servicing costs continue to rise, but at a more modest pace

As mentioned earlier, SA’s public sector debt and debt servicing costs have escalated dramatically in recent years. The cost of state debt has been the fastest-rising element in the Budget in recent years, costing the country almost R1 billion each day and highlighting the need for government to contain the fiscal deficit to reduce total debt as a percentage of GDP.

Under these circumstances, a significant rise in bond yields, for whatever reason, would put the country’s fiscal position under increasing strain. Already the cost of debt exceeds the total Budget allocation for key government departments, including public order and safety, health care, and housing development.

Encouragingly, although government’s gross debt to GDP is projected to continue increasing over the next few years, reaching a peak of 75.3% of GDP in 2025/2026, it is then expected to moderate on a sustained basis, despite government’s recent decision to bail out Eskom to the value of R254 billion over the next three years. In other words, while government debt and the associated debt services costs remain substantial and uncomfortably high, the deterioration is being contained, with government debt projected to fall to around 67.1% of GDP by 2031/2032.

In addition, the debt-to-GDP trajectory is expected to be lower than 2023 MTBPS estimates. In the 2023 MTBPS, government expected debt to peak at 77.7% of GDP in 2025/2026 before moderating to 71.7% by 2031/2032. The lower debt level is mainly due to lower gross borrowing requirements from the use of some of the GFECRA funds (discussed below) over the medium term, maturing loans, and the Eskom debt-relief arrangement.

Use of the Gold and Foreign Exchange Contingency Reserve Account

In an effort to mitigate fiscal risks associated with higher borrowing costs, the South African Reserve Bank (SARB) and government have changed the arrangements governing the GFECRA to allow government to access a portion of the funds. GFECRA captures valuation gains on SA’s foreign exchange and gold reserves. Currently, such gains or losses are not settled but are reflected as assets or liabilities on the financial statements of National Treasury and the SARB. Amid a depreciation of the rand, the GFECRA balance has grown from R1.8 billion in March 2006 to R507.3 billion in January 2024. Under the existing practice, these balances do not qualify for settlement.

Given the large balance, a proposed settlement agreement between National Treasury and the SARB will settle a portion of the valuation gains, after ensuring that the necessary buffer and contingency reserve are fully funded. Therefore, between 2024/2025 and 2026/2027, government will access R250 billion of the GFECRA balance to reduce borrowing, and consequently the growth in debt-service costs. According to National Treasury, of this amount, government will initially receive R100 billion to pay down debt, while another R100 billion will be available to the SARB to stabilise money market conditions. A further two tranches of R25 billion each will be available to government over the next two years. This will be formalised through legislation.

While using the GFECRA will allow government to achieve a more sustainable debt path, making the medium-term gross borrowing requirement R196 billion lower than projected in the 2023 MTBPS, it does pose some risk to government’s consolidation efforts. Since the funds will be used to reduce domestic market financing requirements, the growth of debt stock and debt-service costs, this move gives government room to continue spending with less concern about the unsustainability of the debt trajectory. In other words, government may avoid making the tough decisions that are needed to rein in expenditure, causing the expenditure ceiling to creep up again without pressure from high debt levels.

In addition, while the reduction in debt is a welcome step, it is a concern that none of the funds have been allocated towards growth-generating projects. Instead, government is using an asset to facilitate ongoing expenditure rather than grow the economy. In effect, this could just be delaying the inevitable: unsustainable debt levels in a perpetually low economic growth environment.

Conclusion

Overall, the Minister of Finance presented a sensible Budget under difficult economic conditions, avoiding the temptation to become more populist in an election year, and there were no shock tax announcements. Instead, the Minister reiterated the need to control expenditure over the medium term, while continuing the path of fiscal consolidation. The success of this year’s Budget will be determined by government’s ability to maintain fiscal discipline, while ensuring that key policy initiatives are implemented much more effectively.

It is also clear that government’s debt issuance should remain manageable, especially given the conservative approach that National Treasury continues to adopt in ensuring that debt issuance is undertaken proactively and that it retains a large cash portion. Contributing to this is access to a pool of funds from GFECRA.

Despite these efforts, four key fiscal concerns remain. Firstly, controlling the increase in social payments and wages over the next few years will remain challenging, given the ongoing lack of job creation. Secondly, the projected increase in tax collection over the next three years might be difficult to achieve, given that National Treasury does not project economic growth to rise above 2%. Thirdly, there is still a real risk that various SOEs will require additional government support over the coming years, the most concerning of which is Transnet. Lastly, the rise in debt service costs, if left unattended, could severely undermine government efforts to retain fiscal stability.

Although several policy options are available to revitalise the South African economy in the medium term and therefore improve government finances, the range of workable solutions has diminished substantially over the past ten years, given the destruction of the public sector’s balance sheet and the weakening of key public sector institutions, including many SOEs.

At this stage, apart from trying to resolve the ongoing electricity crisis, the most viable policy initiatives would still include substantially expanding the use of private-public partnerships, the extensive deregulation of the business sector in a concerted effort to make it easier to do business and lift business confidence, a turnaround strategy for failing municipalities, a demonstratable focus on restoring good governance (including successful prosecutions), and the urgent reorganisation of SA’s fragile rail and port capacity.

STANLIB Economics Team

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