Government’s budget headache to last another three years

South Africans should prepare for three more years of significant budget deficits, as government expenditure will continue to outpace inflation.

Nedbank economist Isaac Matshego said the February 2024 Budget is set to be another difficult budget for South Africa.

“The revenue numbers are not looking pretty. We’ve already seen from the numbers released up to December that revenue growth is actually very, very limited at around 0.2%,” he said. 

“And on the expenditure side, we’ve seen growth of close to 8%.”

Nedbank expects Finance Minister Enoch Godonwana to announce a revenue shortfall of R55 billion for the 2023/34 financial year.

Tax revenue disappointed in 2023 largely due to lower-than-expected corporate tax income, as companies struggled to make profits in the country’s weak economy.

To make up for this shortfall, Nedbank expects the government to try to raise revenue rather than cutting spending.

“National Treasury intends to raise about R15 billion Rand from new taxes or maybe adjustments of the current taxes,” Matshego told Newzroom Afrika. 

“But I believe it’s going to be a bit difficult for National Treasury to raise taxes in this environment.” 

“We saw it happening in the mid-2000s from around 2015 to 2018, with the higher tax rates not necessarily generating higher revenue.”

This is likely due to an economic principle called the ‘Laffer curve’, which illustrates a theoretical relationship between the taxation rates in a country and how that affects a government’s tax revenue.

Simply put, the Laffer curve suggests that if tax rates are increased above a certain level, tax revenue can fall.

This is because taxes above a certain level could discourage people from working, resulting in lower consumption expenditure levels and encouraging companies to move to other countries.

To balance the country’s budget, Matshego said the National Treasury must ensure that it borrows less every year.

“Because the moment it borrows more and more, the interest payments on existing debt are going up,” he explained. 

The government’s debt servicing costs have more than doubled since 2008, crowding out other expenditures and raising the prospect of a debt spiral. 

The share of debt-service costs to the main budget revenue increased markedly from 14.3% in 2019 to 20.7% in 2023, well above its long-term average of 13.0%. 

The government projects that its debt-service costs will settle at 22.1% of main budget revenue in 2026 and 5.4% of GDP before easing. 

“Those debt service costs are eating into the revenue, which is already struggling, and all the other pressures, such as the Eskom debt package, and now Transnet is also in need of help,” he said.

“So the Minister and National Treasury have to basically keep many balls in the air and strike a good balance between the need to support the local economy while keeping government finances sustainable.”