As South Africa braces for the 2024 Budget speech on February 21st, economists at Nedbank are painting a sobering picture, suggesting that the fiscal landscape may not offer much deviation from current struggles. While the country’s economic conditions are expected to mirror those outlined in the November Medium Term Budget Policy Statement (MTBPS), looming challenges threaten to exacerbate an already precarious situation, potentially leaving tax revenues a staggering R40 billion short of initial Treasury projections made just three months ago.
In their pre-budget analysis released on February 15th, Nedbank’s finance group highlighted a gloomy outlook characterized by persistent load shedding, transportation bottlenecks, soft global demand, and subdued commodity prices. These factors, coupled with high domestic interest rates and a challenging operational environment, are poised to hinder production, exports, consumer spending, and fixed investments, further exacerbating South Africa’s economic woes.
While the National Treasury had already factored in many of these adverse conditions in the MTBPS, Nedbank’s modeling suggests that the impact on tax revenue may have been underestimated. The anticipated shortfall in tax revenue, primarily attributed to sharply lower company taxes driven by declining mining profits and elevated operational costs, is expected to pose significant challenges for fiscal consolidation efforts.
Nedbank estimates that gross tax revenue for 2023/24 could fall short by R94.8 billion compared to the Budget 2023 estimate, with a R38 billion variance from the MTBPS 2023 figure. Moreover, consolidated revenue for the same period is projected to be R53.1 billion below the February 2023 estimate, surpassing the National Treasury’s forecasted shortfall.
Despite the revenue shortfall, Nedbank suggests that significant tax rate hikes are unlikely. Instead, the National Treasury may seek to augment revenue through below-inflation adjustments to personal income brackets. However, with revenues under pressure, the bank anticipates a corresponding increase in government expenditure, driven by factors such as public sector wage settlements and mounting debt service costs.
The pressure on government spending was evident in 2023/24, with aggregate spending increasing by almost 8% year-on-year, surpassing both MTBPS and Budget 2023 projections. Looking ahead to 2024/25, the National Treasury is expected to maintain expenditure restraint, limiting expenditure growth to around the projected inflation rate for the next three years.
The fiscal constraints outlined in the MTBPS 2023, including the absence of additional spending space and adjustments to social grants below the inflation rate, underscore South Africa’s precarious fiscal position. Despite President Cyril Ramaphosa’s pledge to extend social relief grants and enact the National Health Insurance Bill, Nedbank does not anticipate new funding allocations for implementing the NHI in the upcoming budget.
However, the bank expects additional financial support to be announced for Transnet, the embattled ports and rail company, amidst ongoing challenges. With revenue expected to decline and expenditure on the rise, Nedbank predicts that South Africa’s consolidated budget deficit for 2023/24 could swell to approximately 5.4% of GDP, narrowing marginally to 5.2% in 2024/25, with a projected surplus not materializing until 2025/26 – a year later than initially estimated in the MTBPS 2023.
As South Africa navigates these economic headwinds, the upcoming Budget speech will serve as a critical juncture, outlining the government’s fiscal strategy in the face of mounting challenges and striving to instill confidence in the country’s economic trajectory amidst uncertainty.
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