Budget 2024: Exciting prospects and realities – Chris Harmse

Chris Harmse is the consulting economist of Sequoia Capital Management.

Chris Harmse is the consulting economist of Sequoia Capital Management.

Published Feb 19, 2024


FINANCE Minister Enoch Godongwana will have a very daunting task as he delivers his Budget speech on Wednesday.

He faces the following challenges:

– Will the economy grow this year by 1.5% as was predicted in last year’s Budget, or even the adjusted 0.8% that was projected during the October Medium-Term Budget Policy Statement (MTBPS)?

If not, the government revenue and debt will remain under pressure.

The latest forecast by the International Monetary Fund (January 2024) indicates that: “The economy will likely grow a meagre 1% this year, significantly slower than the IMF’s forecast in October, when it saw South Africa’s gross domestic product (GDP) expanding by 1.8%,” the Washington-based lender said on Tuesday in an update to its World Economic Outlook.

– How will government reduce debt service cost that is now the biggest cost item on the Budget? Debt service cost have more than doubled between 2008 and 2023.

The gross debt stock is projected to increase from R4.73 trillion in 2022/23 to R5.84trl in 2025/26. Due to the Eskom debt relief, government debt is at higher levels, exceeding 70% of GDP, and will it in fact stabilise at a higher level of 73.6% of GDP and in 2025/26?

– How will the government address the issue of the ever-growing government salary account? In 2023 an average increase of 7.5% salary adjustment for public servants for the financial year 2023/24 and a capped projected consumer price index salary increase for the 2024/25 financial year was negotiated and accepted .

– Will the government give more structured plans on the two main issues that were suggested in the MTBPS: namely the reconfiguration of the state departments and the reforms towards improving energy security (Eskom) and transport efficiency (Transnet)?

The minister in last year’s Budget speech summarised the above dilemma as follows: “There are risks to the fiscal outlook. These include a worsening of the economic outlook, a further weakening of the finances of state-owned companies, and an unaffordable public-service wage agreement.” How will these dilemmas affect this coming year’s Budget?

Expected income, expenditure and tax proposals

During the previous two Budget years, there were no changes to the three main budget income items, namely company taxes, personal income tax and VAT.

In the 2023/24 Budget the minister indicated that there was such an improvement in revenue due to higher collection in corporate and personal income taxes, and in customs duties, that it not only partially offset the lower value-added tax estimates, but also improved the total revenue by R10 billion.

The question remains if the same improvement in the tax revenue for 2023/24 is envisaged.

Data from Goldman Sachs Economic Research indicates that total revenue over a 12-rolling basis in December 2023 was 3.9% higher and more than the MTBS forecast of +2.6%. It is expected that revenue will be between R10bn and R20bn more than the MTBPS projections.

According to the Goldman Sachs, government expenditure slightly exceeds the MTBPS forecast, but it is expected that the Treasury may still slightly outperform the full year main budget deficit estimation of 4.7% of GDP and its objective of a 0.3% of GDP primary surplus. (Primary surplus or deficit is income against expenditure before interest payments and capital expenditure.)

Tax adjustments

If the government, therefore, keeps with its medium-term income and expenditure framework projections for 2024/25, the economy growths around 1.0%, then one may expect that there will be minor adjustments to taxes.

The following tax adjustments, however, may also be imposed:

– The personal income tax brackets may not be fully adjusted for inflation.

– Medical tax credits may not be increased to adjust for inflation.

– The retirement tax tables for lump sums withdrawn before retirement, and for lump sums withdrawn at retirement, may not be adjusted upwards.

– The fuel levy and Road Accident Fund levy may be adjusted upwards as there were no adjustments in the past two years.

– The sin taxes will be increased as usual.

The main other question that has arisen over the past few months is whether the government will ask the Reserve Bank to release some of the R500 billion increase in the country’s gross gold and foreign reserves.

Other development countries use these reserves. South Africa can use these reserves for general debt relief, pay back Eskom and Transnet debt, and bring down the debt service cost.

In this sense the minister may then have some room to manoeuvre for needed infrastructure and other development financing to ignite better economic growth and sustainable development.

If there is the political will to do this and if it will not lead to more state capture of these funds are other questions that may be asked.

Overall, the minister may surprise us all with a very fair and well-prepared Budget.

Chris Harmse is the consulting economist of Sequoia Capital Management