National Treasury’s most recent February data shows that public finances are in a poor state and have worsened since November’s Medium Term Budget Policy Statement (MTPPS), with the budget deficit expected to widen from February’s Budget forecast of 4% of GDP and then 4,9% in November, to 6% of GDP.
This fiscal slippage is largely due to lower revenue performance due to lower economic growth (expected at 0,5% of GDP), a higher public sector wage bill, and higher debt service costs. This delays attempts at fiscal consolidation, with gross debt to GDP set to escalate from last February’s projected 72.2%, and November’s 74,7%, and not expected to peak at 77.7% in 2025/26, as projected.
This is far higher than the debt ratio of 60% which is generally seen as the maximum sustainable debt ratio for an emerging economy like ours. In view of this, the ACDP looks forward to further details of additional rules required to provide an anchor for fiscal sustainability alluded to in November’s MTBPS.
Lower economic growth has largely been caused by ongoing load shedding and severe challenges with logistics, both rail and ports, as well as reduced demand for commodities (which provided the previous tax windfall in 2021 and 2022).
Fiscal consolidation will be far more difficult to achieve in this election year. It was assumed that the social relief of distress grant paid to about 8 million people would come to an end in March 2024. This is unlikely due to the pressing social needs and the elections.
There are also further pressures for bail-outs to SOEs, such as Transnet, which has requested a R47bn equity injection or loan, as well as for taxpayers to take over R61bn of its R130bn debt. As it is National Treasury provided an additional R47bn guarantee already to make it easier for Transnet to raise capital in the markets. This must be seen against the amount appropriated against the Eskom Debt Relief Act and the payments to Eskom amounting to a staggering R44bn for the year.
The implementation of the unaffordable National Health Insurance Bill will probably not even be factored in, given the fiscal constraints.
The rising debt levels (R5.2tn gross debt in 2024/25) and debt service costs (R385.9bn in 2024/25), crowds out much needed expenditure on social development, health, community development, economic development and peace and security, and infrastructure development.
The ACDP believes that the only long-term solution to this debt spiral is a rejuvenated economy, premised upon stable energy provision and a vastly improved logistics network.
Although the MTBPS stated that revenue measures to raise an additional R15bn will be announced in the Budget, the ACDP does not support tax increases, given the financially hard-pressed situation households and businesses find themselves in. The South African Revenue Services (SARS) needs to focus on enforcing compliance in areas such as fraud prevention, curbing illicit trade, voluntary disclosures. It can also reduce the tax gap, which is the difference between taxes legally owed and taxes collected, and is estimated at about R300bn. By collecting only 10% of what is due would contribute an extra R30bn to the fiscus.
The alternative to tax increases is reducing government expenditure. There are ways of cutting government expenditure in ways that don’t affect service delivery, such as reconfiguring government by merging various departments and ministries. We are concerned that National Treasury last year already required cost containment measures, which have a detrimental impact on service delivery, including crime prevention, health and education services.
In addition, the ACDP has always maintained that billions of rands stolen through state capture and corruption state should 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 and the Asset Forfeiture Unit). Additional funds recovered can also help balance the books.
Given the slow recovery of the tens of billions of rands stolen through state capture and corruption, approach civil courts internationally to recover these funds, which have special procedures that are swift, often unopposed, and very effective. Qualified lawyers acting in terms of properly procured contingency fee arrangements would be appointed to expedite recovery via what is known as anti-dissipation orders, or Mareva injunctions (freezing or asset protection orders).
The ACDP is concerned about proposals to use part of the Gold and Foreign Exchange Reserve Account (GFECRA) to offset the fiscal deficit. While it has been argued that South Africa does not need excessive reserves and could use at least a portion of the GFECRA gains either to reduce debt or as revenue (by selling the underlying asset to realise a notional gains), the Reserve Bank argues that R100bn of the current R497bn in the account tends to be impacted by market volatility and the decrease of the country’s reserve buffers at a time of heightened uncertainty may not be the best strategy. It may also create a dangerous precedent going forward.
The Budget will provide further details and a clearer picture of government’s commitment to fiscal consolidation and improving economic growth. The ACDP will be closely monitoring the Minister’s Budget proposals when he tables his Budget this coming Wednesday.
