The government began the 2023/24 financial year on the back foot as public finances deteriorated from the onset in the first quarter of the fiscal year between April and June, with the national debt rising above R4.9 trillion.
This was revealed in the Quarterly Bulletin released by the South African Reserve Bank (SARB) yesterday.
According to the SARB, the national government recorded a cash book deficit of R47.1bn in the first quarter of fiscal 2023/24, compared to a cash book surplus of R11.5bn in the same period of the previous fiscal year.
The bank said that the deficit was primarily financed in the domestic financial markets through the net issuance of long-term government bonds.
“Consequently, national government’s gross loan debt increased by 10.9% year on year to R4 948 billion as at 30 June 2023 due to a combination of the net issuance of domestic and foreign debt as well as a revaluation following the depreciation in the exchange value of the rand,” said the SARB.
The deterioration in government finances has prompted the National Treasury to propose drastic spending cuts on recruitment, travel, accommodation, and events by all government departments and entities ahead of the Medium-Term Budget Policy Statement (MTBPS).
Old Mutual Wealth investment strategist Izak Odendaal said that by and large, the deterioration in public finances this year matches the deterioration in economic growth.
Odendaal said a weaker-than-expected economy generated less-than-projected tax revenues, as lower company profits mean less corporate taxes, weaker growth in salaries means slower growth in personal income tax, and subdued spending means subdued VAT.
“Though lower global commodity prices are part of the story in terms of lower company profits and taxes, the big reason is the own goals we scored: more intense load shedding and the implosion of freight rail,” Odendaal said.
“The only way to stabilise debt levels is some combination of raising taxes or cutting spending. Raising taxes can be done through increasing tax rates, such as the 15% VAT rate, but the economy is probably near the ceiling of the tax burden it can manage.
“The best way of raising taxes is faster economic growth. Treasury does not control the economy’s growth rate, but the government can allow for increased private participation in electricity generation and logistics, and it can cut unnecessary red tape.”
Data coming in from Treasury paints a negative picture on expenditure in particular for this fiscal year, with South Africa recording R685bn in spending by July versus R628bn for the same period a year ago.
In addition, revenue has been undershooting, unable to absorb governments over spending versus budget this year. The revenue undershoot to date comes as commodity prices weakened and freight capacity worsened.
Revenue collection, at R494bn for the year to date is below that of last year for the same period of R510bn, with Transnet’s inability to meet the demand for exporters causing a particular hole in revenue.
Investec chief economist Annabel Bishop said the State continued to fail to trim expenditure, but reducing the number of government departments could save an estimated R17bn.
Bishop said Finance Minister Enoch Godongwana had indicated either higher taxes or increased bond issuance was on the cards if expenditure was not cut, and so the fiscal deterioration had undermined bond yields in South Africa.
She said the tax revenue shortfall South Africa was facing risked giving rise to a widening fiscal deficit, above the -4.0% of gross domestic product (GDP) estimated for the 2023/24 fiscal year in the February 2023 Budget.
For an emerging market a fiscal deficit of -3.0% of GDP or closer to a surplus is deemed sustainable, with the MTBPS, at risk of showing a revision of closer to -5.0% of GDP instead.
“Government finances are increasingly unsustainable, with the tax to GDP ratio rising rapidly, also quelling economic growth, while borrowing is at 72% of GDP, and set to rise to 74% of GDP – but below 60% of GDP is sustainable for emerging markets,” Bishop said.
“With deteriorating investor appetite and revenue, cutting expenditure is the most fiscally prudent, especially cutting wastage, inefficiencies and corruption, as well as severely under performing programmes and areas in government.”