Budget Review: a better-than-expected budget

2024’s Budget saw better fiscal ratio projections compared to 2023’s MTBPS, as R150bn of the profits of the Gold and Foreign Exchange Contingency Reserves Account (GFECRA) was utilised, a methodology followed by many other countries.

The drawdown on the GFECRA over the 2024/25 and 2026/27 period, will be used to reduce borrowings and borrowing costs (the latter by R30.2bn). Borrowing costs are a larger share of expenditure than basic education, social protection or health.

In November 2023’s MTBPS, gross debt was projected to peak at 77.7% of GDP in 2025/26, but it has now dropped to 75.3% /GDP, although still higher than the 73.6% /GDP projected for 2025/26 in 2023’s Budget.

Gross debt is now projected below 70.0% /GDP in 2031/32, at 67.1% /GDP, although it is still well above 60% /GDP seen as the maximum sustainable debt ratio for an emerging market economy.

Overall, the Budget shows marked improvements on the 2023 MTBPS’ projections, made possible by the utilisation of some of the R500bn in the GFECRA, with National Treasury likely dipping into more in future.

For this fiscal year (2023/24), debt is now estimated at 73.9% of GDP, below the 74.7% of GDP in 2023’s November MTBPS, but above February 2023’s Budget projection of 72.2% of GDP.

The medium-term revenue outlook was revised up by R45.6bn from the 2023 MTBPS, and expenditure by R57.6bn. A primary surplus is however expected to be achieved this fiscal year, and over the medium-term.

The 2023/24 budget deficit remains at -4.9% of GDP for his year and is projected lower in the medium-term. The rand strengthened somewhat, as have bond yields, with the projections also relieving some pressure on the country’s credit ratings.

Given the usage of the GFECRA, government has reigned in most of the fiscal slippage of 2023 MTBPS and runs a primary budget surplus instead. Overall, the budget is better than expected, with the most made of a difficult environment.

Specifically, the fiscal deficit drops to -4.5% of GDP in 2024/25 (-4.6% /GDP was projected in the MTBPS), then declines to -3.7% for 2025/26 and then -3.3% of GDP for 2026/27 versus -4.2%/GDP and -3.6% GDP respectively in the MTBPS.

On the tax front, no major changes occurred, with no adjustment for bracket creep as a consequence of inflation which saw National Treasury raise its R15bn revenue shortfall, as expected. 

With 2024 an election year, VAT and income taxes were not expected to be hiked, and also not the fuel levy or RAF levy, yielding tax relief of R4bn. National Treasury recognised the weakness of the SA economy.

The Budget did see the normal rise in sin taxes, with the prices of various types of alcohol to increase by between 6.7% and 7.2%, and the types of different tobacco products seeing hikes of between 4.7% and 8.2%. 

The Budget did not provide a bailout for Eskom, nor was it expected to, but it did note that Eskom’s prior announced debt-relief programme remains on track to end in 2025/26, with adherence to its strict conditions.

Transnet was granted a R47bn guarantee with conditions. Also of note, South Africa will implement a global minimum corporate tax rate, with multinational corporations subject to an effective tax rate of at least 15 per cent. 

As expected, the Budget saw the downwards revision of government’s real GDP growth projections, to 0.6% y/y, from 0.8% y/y previously, now more in line with Investec’s view of a 0.5% y/y expansion for 2023.

Government’s growth forecast for this year are likely overly optimistic, with heavy load shedding in evidence and freight and energy supply constraints will persist over the year. 

For 2024, government revised up its growth forecast to 1.3% y/y from 1.0% y/y. Either way however, 1.0% y/y or 1.3% y/y is a weak growth rate for San and will not make meaningful inroads into the high unemployment rate.