Godongwana’s mammoth medium-term budget

Finance Minister Enoch Godongwana has a huge task on his hands in delivering next week’s Medium-Term Budget Policy Statment (MTBPS). 

Not only will the minister have to balance fiscal consolidation with the need to boost the local economy, but he will also deliver the first budget statement under the Government of National Unity (GNU). 

The MTBPS is where the rubber hits the road for the GNU, Coronation economist Marie Antelme said. It will be the first time the political goodwill of the GNU has to be distilled into fiscal policy.

Available fiscal data for the year to date show that the National Treasury has maintained a firm hold on expenditures.

However, government revenue will likely disappoint as corporate profits remain under pressure and VAT collection has been depressed by weak spending growth. 

Nonetheless, excluding the accounting impact of the Gold and Foreign Currency Exchange (GFECRA), cumulative expenditure is running at 4.3% year to date against a budget target of 4.5%. 

The pragmatic use of GFECRA profits should help reduce the debt stock by about 1.4% of GDP in 2024/25 and help slow down government debt growth in the next two fiscal years.

Despite this commendable consolidation, Antelme said the laundry list remains long. 

Practically, public sector wages have not been agreed upon. The February budget assumes a 4.5% increase from last year, but this is unlikely to hold. 

Coronation expects slightly higher increases at 5.2% for the period ahead. 

It also believes financial support to assist Transnet’s financial position will still be needed, and the financial failures at other state-owned enterprises (SOEs) remain unresolved. 

Thus, further bailouts cannot be ruled out, which poses a risk to the Treasury’s debt reduction efforts as it may have to take on billions more from Eskom, Transnet, and others. 

Treasury’s conditional debt bailouts have failed to have the desired effect on SOEs’ financial health, with Eskom being the only one to show a significant financial turnaround. 

The utility expects to break even in the current financial year and post a R12 billion profit in the 2026 financial year.

However, rising municipal debt, which has crossed R80 billion, poses a significant threat to this outlook. 

“We think the National Treasury will struggle to maintain the tight hold on expenditure given these demands and expect debt to continue to accumulate in the absence of considerably stronger growth,” Antelme said. 

The government’s growing debt burden is shown below, with its forecast compared to that of Coronation. 

Godongwana’s MTBPS is also expected to reveal how the new government plans to revive South Africa’s economic growth after a decade of stagnation. 

Antelme explained that South Africa’s economic stagnation really set in after the 2008/9 Global Financial Crisis.  

Average economic growth slowed from 4.1% in 2008 to 2.1% in 2015, including the support from the spending associated with the World Cup Soccer in 2010, offset by the onset of load-shedding. 

Since 2016, the average real GDP growth has been just 0.6% below the population growth rate, implying that South Africans have gotten poorer. 

The primary reason for the slowing was a steady collapse in investment, which undermined productivity and contributed to weak, low-quality employment and low economic-value consumption. 

The degradation of institutions, largely public but also private organisations, in a reinforcing loop systemically undermined confidence, and state capture exacerbated this process. 

Godongwana’s MTBPS is expected to show how the new government plans to unwind this decades-long decline without significantly increasing government spending. 

Antelme said the main focus should not be on creating a ‘new’ plan but rather on accelerating the implementation of reforms started under the previous administration. 

Reform of network industries, such as electricity, logistics, and water, should be top of mind as they present a significant hurdle to sustained economic growth. 

Much progress has been made regarding reform in the electricity sector, with the country experiencing no load-shedding for more than six months. 

However, progress has been painstakingly slow regarding Transnet and crime and corruption, the two other workstreams of the government-business partnership. 

Private participation is key to sustainably stronger fixed investment. However, it is still too early to see sufficient evidence of meaningful momentum in forming effective partnerships. 

Coronation is encouraged, though, by the increase in business confidence, which, if sustained, is a useful leading indicator of private investment.