Godongwana’s Budget will be a ‘wake-up call’ for government

The government will get a wake-up call in the Finance Minister’s Budget Speech this week as debt-servicing costs are likely to become the largest spending item in the budget. More will be spent on servicing public debt than on healthcare, education, and policing. 

This is feedback from Citadel’s chief investment officer, George Herman, who outlined the difficult position Finance Minister Enoch Godongwana is in. 

Herman expects to hear populist promises and over-optimism, which is geared more toward voters in the country’s national elections than the financial markets.

“We will need to scrutinise the numbers coming out of the budget very carefully to see if Godongwana’s budget proposals are viable and achievable given the country’s high debt burden and strained tax base,” said Herman.

“The benefits we had seen from higher commodity prices have now subsided, and corporate tax is truly under pressure, which means the revenue will be lower.”

Herman said Citadel does not expect any major tax hikes as it is an election year. Instead, the government may raise sin tax and fuel levies in line with inflation. 

They may also rely on ‘bracket creep’ to make up funds. Bracket creep happens when inflation pushes wages and salaries into higher tax brackets without real earnings increasing. 

Bracket creep could increase tax take by an estimated R15 billion to R20 billion, which will cover a few holes.

Herman said the budget’s main focus will be on government spending. In particular, the public servant wage bill, state-owned enterprise (SOE) bailouts, and debt-servicing costs. 

“Over the last two years, there has been under-budgeting in terms of the government wage bill. In fact, last year’s medium-term budget and the budget as it stands today still shows over-optimistic numbers.”

National Treasury has indicated it would make up the shortfall by reducing the state’s workforce and natural attrition, which has not happened. 

A far bigger issue is that rising interest rates have sharply increased debt servicing costs. 

“In this year’s budget, we will find that South Africa’s debt servicing cost has become the single largest component of the expenditure budget.” 

“We are paying more for debt servicing now than any other subcategory in the budget – more than education, healthcare and policing – which should be a wake-up call to the government in terms of the fiscal restructuring that needs to take place.”

Herman said the financial markets are eagerly awaiting comments on any structural reforms that would come into play in the coming year. 

Most important would be SOE bailouts as Eskom’s numbers have been in the budget for quite some time, but more recently, Transnet also asked for bailouts, and the Post Office will need some budget as well. 

“Suddenly, the risk becomes enormous.”