Given the additional challenges facing the national fiscus and economy, stakeholders agree that the upcoming medium-term budget should be realistic and sound.

Ahead of the Medium-Term Budget Policy Statement (MTBPS) being presented on November 1, North-West University Business School's Professor Raymond Parsons says unless remedial steps are taken, the risks of another fiscal cliff for South Africa will rise.

National Treasury earlier this year warned of the tough decisions that needed to be taken in the medium-term budget, considering a likely revenue shortfall of R100-billion.

The lack of fiscal sustainability is likely to keep interest rates elevated for longer.

Financial services provider Nedbank expects tax collections to fall short of the February 2023 Budget by about R47-billion in the 2023/24 financial year, and by R156-billion over the medium-term expenditure framework – 2023/24 to 2025/26.

The bank says the weaker-than-expected nominal gross domestic product (GDP), accompanied by lower commodity prices and tougher domestic operating conditions, has reduced corporate profits and therefore tax revenue. As a result, it forecasts revenue growth for 2023/24 at a low 1% compared with 3.5% stated in the national budget.

Nedbank also expects real GDP growth to come in lower at 0.6% in 2023 and at 1.1% in 2024, compared with Treasury’s forecast of 0.9% and 1.5%, respectively, in February. 

Parsons affirms that the combination of low-growth and lower-than-expected tax revenues, coupled with continued high government spending, means that the economic and financial assumptions on which the 2023 Budget projections in February were based are no longer valid.

Several of the fiscal risks outlined in the main Budget have materialised. These factors have now severely reduced available fiscal space, necessitating a realistic approach to a less favourable set of circumstances.

“If the medium-term budget is not credible in its actions, it will be assumed that there will just be more borrowing or big tax rises to come later,” Parsons notes.

He highlights a particular concern as being government continuing to provide bailouts to struggling State-owned enterprises (SOEs), including for freight utility Transnet to implement its turnaround plan.

Nedbank points to a particular concern as being the high public sector wage bill. In fact, the bank expects government expenditure to increase by 6% in 2023/24, compared with a 3.4% increase projected in February.

Government spend remains high owing to rising debt service costs, higher social transfers and bailouts to public entities.

In turn, the Bureau for Economic Research has also warned that Transnet’s request comes at an inopportune time for the fiscus. How Treasury decides to respond to Transnet’s need for further assistance will be seen in the MTBPS.

Parsons points out that South Africa is already at the outer boundary of what can be reasonably done to contain the debt burden and stabilise public finances.

He adds that with the debt-to-GDP ratio now above 70% and expected to increase further, South Africa's debt bill is already absorbing too large a share of the Budget at the expense of other major social spending and infrastructure.

Parsons recommends that Treasury try to wind down spend and bring the debt under control in a way that establishes clear priorities for the future. He emphasises that fiscal policy will have to be pragmatic and realistic to deliver sensible trade-offs and a credible medium-term budget.

All this while political elections are due in 2024.

Parsons explains that the number of countries that have grown successfully out of large debt is really quite small, whereas the number of economies that got into major fiscal difficulties that ultimately ended in inflation and other economic distortions is quite large.

This emphasises why there can be no complacency about the immediate medium-term budget challenges and no doubt about the Treasury's determination to keep the fiscal situation manageable.

He believes the medium-term budget should reflect a renewed commitment to do what is necessary to help reduce South Africa’s risk premium by strengthening the pillars of fiscal sustainability.

Nedbank expects the consolidated budget deficit to widen to 5.5% of GDP in 2023/24, compared with 4% projected in the national Budget, with the deficit remaining at an average 5.3% a year over the medium term.

Given a wider budget deficit and the likely debt relief for Transnet, Nedbank says the gross-debt-to-GDP ratios for the next three years will be higher than reflected in the national Budget.

No major revenue measures will be announced in the MTBPS, Nedbank states, adding that budget developments over the remainder of 2023/24 will determine whether tax changes in the February 2024 Budget statement can be expected.

The bank also deems it likely that government will discontinue the solar panel tax rebates introduced for the 2023/24 tax year as loadshedding becomes less intense.

While the government’s plan to cut spending will be a positive step toward fiscal consolidation, the reduction of some social expenditures will be challenged by some stakeholders, such as trade unions and opposition parties, Nedbank says.

However, it would go a long way if cutting current spending could be accompanied by higher capital spending that would help to grow the economy or create an environment for private sector investment to flourish, the bank adds.

Nedbank warns that the rollout of the proposed National Health Insurance scheme, for example, if implemented, will push borrowing and interest payments even higher.

SOE SPECULATION

At the time of the MTBPS 2022, the focus was on the likely quantum of the Eskom debt relief package.

After a R254.4-billion debt reduction plan was tabled for the electricity utility, speculation is now on the size of a similar debt package for the ailing Transnet.

Transnet’s debt totals R130-billion, and Nedbank says if government is to cover 50% of this debt, it will amount to R65-billion, which increases to R104-billion if government decides to cover 80% of the debt.  

Adding the borrowings for the Transnet debt under these scenarios to the Eskom debt relief package raises the debt-to-GDP ratio significantly over the medium-term period.

Under the 50% scenario debt-to-GDP rises to 77.7% in 2025/26 and to 78.2% under the 80% scenario.