Finance Minister Enoch Godongwana. (Photo: Mlungisi Louw/Gallo Images)
Taking the cue from the 2024 medium-term budget policy statement (MTBPS) and the 2025 State of the Nation address, two major objectives are expected to dominate in this week’s budget speech — the stabilisation of government debt and the pursuit of rapid, inclusive and sustainable economic growth.
The achievement of each is fraught with difficulties in their own right. The real challenge, however, lies in the fact that, at least in the short run, the two are at odds with each other.
The concerns about the level and use of government debt have been well-chronicled. After bottoming out at a more-than-credible 28% of GDP 17 years ago, that ratio has soared to in excess of 70%. The consequences are alarming. To start with, a sizable portion of the debt has been used to partly finance current government expenditure — civil servant salaries and wages, various social grants and, at times, interest payable on existing government debt.
This kind of spending, while appealing to economically disempowered voters, fails to create real wealth, and merely leaves in its wake a long-term obligation on future taxpayers to repay debt and interest.
The estimated spending on debt service costs over the next three years will account for almost 17% of total government spending, or some 21% of expected revenue. Spending on civil servants’ remuneration is the equivalent of 14% of GDP — one of the highest ratios in the world. Between them, then, debt service costs and civil servant remuneration account for 61% of total government spending, thereby “crowding out“ the allocation of resources to, for instance, education, infrastructure development or health care.
Finance Minister Enoch Godongwana indicated in last year’s MTBPS that the treasury’s plan to stabilise government debt was to maintain large primary surpluses over the next number of years (the primary balance measures the difference between government revenue and government expenditure excluding interest).
Two years ago the commodity price boom provided a higher-than-expected tax revenue windfall. Last year the minister used part of the Gold and Foreign Exchange Contingency Reserve Account to obviate the need to slash government spending or to raise the tax burden.
There are no apparent rabbits in his hat this year. The achievement of primary surpluses may prove to be particularly difficult in the light of a number of militating factors. For instance, although the macro-economic climate is slightly more favourable than a year ago — inflation and interest rates have softened, load-shedding has been largely suspended, business confidence has ticked upwards — the economic growth expectations for the next year or two remain uninspiring. This implies that the organic growth in the tax base will be mediocre at best.
In this regard, we would expect the minister to accommodate in his growth forecasts the potential effect of the “Trump offensive”. Although the South African Revenue Service will be called upon to improve its tax collection performance, there is a good chance that there will still be a shortfall.
As has been the stated intention for the past few years, growth in the public sector wage bill is a key ingredient in the quest for fiscal control. But the recent announcement of a 5.5% salary increase for public servants puts a damper on this lever. Last year, the minister announced an early retirement scheme for public servants; presumably he will provide an update on this.
Further spending pressure persists from the social relief of distress grant. Originally introduced to provide temporary financial relief to those left destitute by the Covid-19 epidemic, it has since become a permanent feature, and looks set to remain intact for at least another year. There are even talks of expanding the reach of the grant, or introducing a broad-based basic income grant. Further details on the financing and roll-out of National Health Insurance should also be expected
The two avenues that provide meaningful scope for savings are the limiting of further financial support to state-owned companies (although the debt obligations of Eskom and the South African National Roads Agency still need to be resolved); and concerted efforts to eliminate wasteful and unauthorised spending by departments.
The limitations to organic tax revenue growth and persistent spending pressures could justify an increase in tax rates. Arithmetically, this would help to narrow the envisaged deficit. But, the arguments against this are equally compelling – against the backdrop of the still anaemic and fragile socio-economic conditions, any increases in the personal income tax, corporate and VAT rates would be counter-productive, and socially and politically difficult to defend. The minister may announce some personal tax accommodation for the effects of fiscal drag.
As always, we can expect sin tax rates to rise. He may also refer to the possibility of exploring some form of a wealth tax.
Turning to the foundations for long-term, sustained, and inclusive growth, the role of government and the treasury is encapsulated in four pillars (as described in the 2024 MTBPS):
Maintaining macroeconomic stability. This is where the importance of smaller budget deficits and a lowering of the government debt ratio is crucial.
Implementing structural reforms. In accordance with Operation Vulindlela, these include the alleviation of load-shedding, the improvement of the logistics system, improving the water supply, and attracting the skills the country needs.
Building state capability. A capable state that delivers a reasonable and reliable standard of public services will foster the necessary environment for more growth and jobs.
Supporting growth-enhancing public infrastructure investment. Investment infrastructure will boost economic activity and enable higher growth over the medium term. One of the reforms included Operation Vulindlela is the enabling of higher levels of private investment infrastructure.
The achievement of these pillars is undoubtedly crucial; it is almost a case of “going back to basics”. Hopefully, the minister will not only stress the urgency of these objectives, but also point out that they will not resolve all the country’s problems overnight — a strong dose of patience will be required.
He should also remind us that the outlays required to achieve these objectives are likely to put pressure on the resources available for spending on social welfare, public servant salaries and the like.
Moreover, although it does not fall within the ambit of the treasury, it should be noted that, in the absence of meaningful labour market reforms, inclusive growth (in the sense of creating a significant number of new jobs) will remain elusive.
All of this brings us back to the rather blunt realities facing the finance minister in preparing and presenting the 2025 budget speech. From a macro-economic and fiscal sustainability perspective, it is imperative that the budget deficit be slashed for a number of years so as to first arrest, then stabilise and eventually lower the government debt ratio. Moreover, any new debt should be used to finance productive, wealth-creating expenditure.
We should not lose sight of the fact that the budget speech is, in essence, a three-year review of projected government expenditure and revenue. Its primary purpose is not to serve as a blueprint for sustained economic recovery and transformation. By spelling out the intended allocation of the revenue to various government programmes, the budget speech provides an indication of the government’s priority preferences and objectives.
Nor can the budget speech be all things to all people. There will always be a gap between various stakeholders’ hopes, expectations and the ultimate reality. At best, the minister can attempt to narrow this gap within the confines of economic and political expediency.
Professor André Roux is an economist at Stellenbosch Business School.