OECD warns South Africa could face massive budget deficit

The Organisation for Economic Co-operation and Development (OECD) said South Africa’s government budget is facing a significant deficit due to its Eskom debt takeover, lower revenue, and calls for a basic income grant.

The OECD is a Paris-based organisation that works with governments, policymakers and citizens to establish “evidence-based international standards and finding solutions to a range of social, economic and environmental challenges”.

In its latest economic outlook, the organisation said slowing fiscal consolidation adds pressure on South Africa’s monetary policy.

It said the government budget projects a narrowing headline deficit to reach 3.9% in the 2023/24 fiscal year.

However, according to the OECD, part of the National Treasury’s announced support package to Eskom, which amounts to R254 billion or 2.5% of GDP, was not included in this budget. 

In addition, falling commodity prices and slower growth are cutting into the country’s tax revenues in the current fiscal year, said the OECD.

The National Treasury has already reported lower revenue in April 2023 compared to April 2022. Revenue in April 2023 was R85.06 billion, significantly less than the R93.28 billion collected in April 2022.

Finance Minister Enoch Godongwana has also expressed concern about the government’s low revenue in the first quarter of this year. 

The OECD also mentioned the impact of rising political pressures for more permanent income support through the “Social Distress Relief” grant and for higher public wages.

It said these pressures are likely to push up government spending. 

“The projected slower pace of fiscal consolidation than foreseen in the budget will add to inflationary pressures and financial vulnerabilities, putting a higher burden on monetary policy,” the OECD warned. 

The organisation was also not optimistic about upcoming interest rate cuts, saying the central bank is expected to maintain the repo rate at its current level (8.25%) until mid-2024 when it expects inflation to start falling slowly.