With GDP growth expected to be around 1.2% in 2024, the government will struggle to raise more revenue. The onus is therefore on the Treasury to find all available means to reduce spending.
“The concern is about revenue, but there are also concerns about spending,” Annabelle Bishop, Investec's chief economist, said in a conversation with Jeremy Maggs on Investec's No Ordinary Wednesday podcast.
Listen to the entire podcast here:
Of particular concern are wasteful and inefficient expenditures, as well as funds being spent on programs with little public benefit. While Finance Minister Enoch Godongwana will no doubt view these expenditure items with a cold eye, his far greater concern is that nearly a third of the budget is spent on public sector wage bills each year. This is what is being done.
It is not just government spending that is weighing down the economy; current spending on social welfare and public sector wages has little effect on boosting economic growth.
Annabelle Bishop, Chief Economist at Investec.Image: Attached
Bishop does not expect revenue collection to improve significantly in the next budget, as there simply isn't any more revenue to collect due to the consistently weak economy. This, combined with the worst year on record for cargo holdouts and port congestion, has forced mines to cut production.
“So the government is planning to borrow more to bridge the gap in terms of the discrepancy between revenue and expenditure,” she says.
“Mr Godongwana is unlikely to announce significant tax increases in an election year, but may instead tolerate bracket creep, where tax brackets remain unadjusted for inflation.” Investec Tax・Said fiduciary expert Pierre Botha. Wealth & Investments joined the podcast discussion. This hurts taxpayers because it means their income is not keeping up with inflation.
Pierre Botha, Tax and Fiduciary Specialist at Investec Wealth & Investment.Image: Attached
Rather than increasing taxes, Botha said the focus could be on increasing tax revenue and widening the tax base.
Government spending continues to rise as interest rates rise rapidly. What could not be recovered through additional income was borrowed from the bond market. This means monetary policy is more restrictive than usual.
All of this has pushed the debt-to-GDP ratio to over 73%, and is projected to reach 77.7% in 2025/6. Last year's budget predicted that the debt-to-GDP ratio would fall below 70% by the end of 2010. That seems increasingly unlikely. A sustainable ratio for emerging markets is a debt-to-GDP ratio of around 60%, and SA appears to be pivoting significantly in the other direction.
Some departments and ministries will ultimately have to exercise discretion to control spending. This has been promised in the past, but there has been little to show for it.
Bishop said he hopes to see more honest action this time around to rein in spending.
If there is a silver lining on the horizon, it is the prospect of accelerating global economic growth in 2024, which should insulate SA from recession and lower interest rates as the year progresses. Inflation is also likely to fall, which will benefit consumers, with continued investment in Transnet's port and rail improvements and solar power to ease the load-shedding crisis.
Tertia Jacobs, an economist at Investec Treasury, said:Image: Attached
The podcast's third guest, Investec financial economist Tertia Jacobs, said the budget is likely to include news on the restructuring of government spending, including a promise to keep spending at a certain level. He said a “fiscal anchor” could be announced. Alternatively, try to stay within the fixed debt-to-GDP ratio.
“If the government can adhere to that framework and get this kind of fiscal anchor that can operate within that framework, it will definitely make an important contribution to credibility and probably lead to a lower sovereign risk premium. “I think so,” Jacobs said.
Spending overruns are likely, but may be alleviated by news that government sector consolidation will take place after the election.
Another issue likely to gain attention is a more favorable attitude towards infrastructure financing, with low interest rates, long-term development finance and public-private partnerships (PPPs) as a way to finance infrastructure without invoicing. It is becoming more and more used. At the Ministry of Finance. Mr Jacobs says he can expect the private sector to play a much larger role in the future.
Despite rapidly rising debt levels, the government remains committed to fiscal sustainability and is a net positive, with the Minister of Finance providing strong leadership both in Cabinet and at the Treasury. There is.
Ruling parties tend to make extravagant promises in election years, but this year will be even more difficult given the dire fiscal situation and limited room for maneuver.
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