The ACDP believes that there is great potential for accelerated economic growth and job creation following the formation of the Government of National Unity (GNU), progress on structural reforms in the electricity and logistics sectors, and renewed optimism in the financial markets. This has seen the return of investor and consumer confidence with the Johannesburg Stock Exchange (JSE) all share index reaching record levels in the past few days.
Economic growth is still projected to lag at about 1% of GDP for 2024, and to average 1.8% for 2025 and 2026. The ACDP trusts that with the necessary structural reforms and focus on infrastructure development, economic growth can exceed 3%, which is the minimum needed to start addressing high levels of unemployment and poverty.
We expect the budget deficit to be slightly weaker at 5% of GDP (up from 4.5% estimated in last year’s medium term budget policy (MTBPS) statement) for the 2024/25 financial year. This fiscal slippage will result in the state’s gross loan debt peaking at 75.5% of GDP in the 2025/26 fiscal year – much higher than the 60% maximum sustainable debt ratio for an emerging market economy.
This is a cause for great concern as escalating debt service costs – more than a billion rand per day – crowd out expenditure on other much-needed budget items, such as health, education, and fighting crime. There is thus a need for containing government debt and expenditure while proceeding with economic structural reforms to improve economic growth.
Finance Minister Enoch Godongwana will need to balance expenditure and revenue in a low-growth environment without the ability to significantly raise taxes or increase debt. He will need to balance structural reforms and economic development while maintaining fiscal discipline.
Despite the potential for much improved economic growth, there are severe risks facing government finances, the most important of which is a potential trade war with the United States (US) following the Trump administration’s recent executive order.
The extension of the African Growth and Opportunities Act (Agoa) later this year has been cast into serious doubt, with $4bn in preferential exports and a total of $20bn at risk should South Africa be removed from the programme. The agricultural, automotive and manufacturing sectors will be the most severely impacted should they lose Agoa’s tariff-free access to the US. This could have a very severe impact on economic growth prospects. Also at risk are the US business and economic development loans and other credit facilities for businesses, as well as South Africa’s dealings with the World Bank and the International Monetary Fund, influenced heavily by the US. The possible loss of $R440 million in annual US foreign aid is deeply concerning as national treasury may have to cover this loss, given the severe impact it will have on the HIV/AIDS and other public health programmes.
The SA Reserve Bank’s Monetary Policy Committee has modelled a possible trade war scenario with a universal ten percent increase in US tariffs, with retaliatory measures by other countries. It may be much higher.
South Africa’s trade relationship with the US must be managed carefully. We trust that President Ramaphosa’s envoys will succeed in not only having the impact of the executive reduced but also ensuring the extension of Agoa and the continuation of US aid to South Africa. We also trust that South Africa’s hosting of the G20 Summit will boost investor confidence and unlock opportunities for the country, particularly in the tourism sector.
The ACDP notes the agreement in the public sector wages, which is higher than inflation at 5.5%, and the National Treasury projections of 4.5%. The bloated public sector wage bill poses a risk to government finances and must be addressed.
We have also opposed the unaffordable national health insurance (NHI) and welcome ongoing discussions in the GNU to reach a solution to this issue.
The ACDP has also lamented the reducing budget of the South African National Defence Force (SANDF) over the years. Yet the SANDF is expected to perform more and more peace-keeping and other functions both domestically and in Africa. While we note the MTBPS allocates an additional R3,5bn for carry-through costs for the deployment in the Democratic Republic of the Congo (DRC), it is clearly insufficient to provide critical combat air and other logistical support for our troops. Additional resources must be given to the SANDF or bring our troops home.
While the ACDP does not support further bail-outs to state-owned companies, this may be unavoidable given the financial pressure facing Transnet. It is also crucial that Transnet, like Eskom, can perform optimally given the crucial role its rails and ports play in facilitating exports.
The ACDP trusts that taxes will not be increased given the financial pressure already facing households and businesses. We expect that there will, however, be less relief for taxpayers for ‘bracket creep’, the normal increases in sin taxes (alcohol and tobacco products), as well as a possible increase in the general fuel levy and Road Accident Fund levy. Medical tax credits will probably also be reviewed.
The South African Revenue Services (SARS) should also focus on enforcing compliance in areas such as fraud prevention, curbing illicit trade, and voluntary disclosures. It can also reduce the tax gap, which is the difference between taxes legally owed and taxes collected, which is estimated at about R300bn.
In addition, the ACDP has always maintained that billions of rands stolen through state capture and corruption could be recovered by further capacitating law enforcement and prosecution agencies, including the Hawks, the Special Investigating Unit, and the National Prosecuting Authority (which includes the Investigating Directorate against Corruption and the Asset Forfeiture Unit).
The ACDP will be closely studying the Budget proposals and recommendations to establish how realistic the economic growth, revenue and expenditure projections are, given the fiscal risks facing the nation, despite the tremendous potential of the GNU.
