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With the National Treasury facing a bigger-than-expected budget shortfall in 2023, talk of tax hikes, budget cuts and other extraordinary measures has created anxiety among businesses, workers and South African households.
According to the latest data from Treasury, the budget moved to a deficit of R143.8 billion for July – the largest since at least 2004 and wider than the R115.5 billion forecast by economists.
South Africa’s fiscal deficit for 2023 is now set to be between 6% and 6.5% of gross domestic product (GDP) – much higher than the minister’s expected 4% when he presented his budget in February this year.
While projections point to the full-year budget deficit heading to R275 billion, Absa’s data shows that it could hit as high as R298 billion.
The country has effectively run out of money and faces a debt trap, and will have to either boost revenue and find funding, or make severe cuts to spending. And neither of these options is easy or palatable.
According to Mike Keenan, Absa’s Head of Fixed Income and Currency Research, while things look bleak for the budget, the government still has options to raise funds and mitigate at least some of the deficit.
The key cause of the deficit is a blow on two fronts – revenue collections are down, and expenditure is up.
Absa noted that after the first four months of the 2023/24 fiscal year – the end of July – revenue growth stood at -3.2% year-on-year (YoY) versus a budgeted rate of 3.6% YoY, while expenditure growth was running at 9.0% YoY versus a budgeted rate of 1.4% YoY.
“The revenue shortfall is mainly a function of softer-than-expected corporate tax collections, which we attribute to subdued commodity prices and intense load shedding,” Absa said.
“VAT collections are also running well behind budget due to tighter monetary conditions and suppressed labour market conditions.”
On the expenditure side, overruns are mainly a function of higher-than-expected public sector wage increases, the bank said, while the Treasury has also made a R16 billion transfer to Eskom as part of its T78 billion debt transfer this year.
The banking group said that the full extent of South Africa’s budget pain will be revealed when finance minister Enoch Godongwana tables the Medium-Term Budget Policy Framework (MTBPS) on 1 November.
However, it said that Treasury can also move now to mitigate the financial stresses.
Specifically, Keenan noted that the department’s borrowing requirements could prove to be lower than expected if Treasury makes use of switch auctions (halving redemptions), keeps up with issuing Treasury bills (T-Bills) and proceeds with a new Sukuk bond auction.
There is also room to lean into concessional financing from the World Bank and the IMF, he said.
“In terms of this year’s offshore funding target of R44 billion, the NT has only obtained R10 billion worth of concessional funding from the World Bank.
“Given that the NT is well within its foreign currency risk benchmarks and considering that such funding is relatively cheap, especially when compared with SAGB issuance, we expect the NT to continue to look for additional concessional loans this fiscal year.”
However, increasing the pace of issuing South African Government Bonds should only be used as a last resort.
According to Keenan, taking these measures proactively – before the end of the financial year – could see National Treasury raise as much as R61 billion worth of additional funding this year, “which will comfortably offset the known R23 billion expenditure overrun”.
“Moreover, by diversifying the finding mix and issuing more front-end debt instruments instead of hiking SAGB issuance, the NT is simultaneously keeping a lid on its debt servicing costs,” the group said.
However, if the November mid-term budget has Treasury upwardly revise this year’s budget deficit estimates for 2023/24 by more than R61 billion, then additional funding will be required.
On the expenditure side, it is widely anticipated that Godongwana and the Treasury will push for budget cuts this year to mitigate the overruns already experienced.
This is not a popular route, however, with unions and politicians pushing back against it.
Read: Difficult trade-offs coming to keep South Africa afloat: report
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