Predicting the Tides of South Africa's National Budget

Predicting the Tides of South Africa's National Budget

As we anticipate Minister of Finance Enoch Godongwana's upcoming national budget speech, it's crucial to analyse key factors that will shape South Africa's economic trajectory. The budget isn't just about numbers on a spreadsheet; it's a reflection of our nation's priorities and commitments. Here, Associate Professor David Warneke, Partner at BDO South Africa, shares his insights into what we might expect and the resulting implications for our country’s economic future.

First, and as intimated by the President in his SONA address, it is almost a certainty that the Minister will announce a continuation of the Social Relief of Distress Grant. Having already factored in an extension of the grant in the medium term budget until March 2025, it is unlikely the minister will go back on this. The reason for this is simple. This grant, vital for around nine million South Africans, underscores the government’s commitment to supporting vulnerable segments of society, especially in an election year. That said, with a cost of approximately R44 billion a year, the grant’s long-term sustainability and impact on the national budget merits careful consideration.

Perhaps a more contentious issue will be the question of public service wages. Last year's budget projected a 0% increase, with subsequent negotiations resulting in a 7.5% raise. As we approach another election cycle, the government may seek to avoid negotiations and go directly ahead with proposing a modest increase of around 5-6% to appease public servants.

Any sort of increase, however, does raise concerns around the sustainability of our public wage bill, particularly when compared to international standards. South Africa has one of the highest paid public sectors in the world, with a total wage bill 3.5% higher than the average of OECD countries. This makes up around a third of total government expenditure, and is not performance-based, meaning increases are applied across the board.

As for education, the need for an increase in funding for NSFAS is crucial, given recent medium term budget cuts that threatened around 87 000 students' access to higher education. Investing in education is investing in the future of our nation, but it must be done responsibly to ensure long-term economic benefits.

However, dreams of a basic income grant may remain deferred, given current economic constraints. In the past, Minister Godongwana rightly emphasised the need for sustainable economic growth to finance such initiatives. Implementing a basic income grant requires a stable economic foundation, which we must prioritise building before introducing such a measure into the budget.

The National Health Insurance (NHI) Bill looms large, yet substantial budget allocations may be deferred amid constitutional challenges. Similarly, the fate of state-owned enterprises (SOEs) remains uncertain, with discussions on mergers and closures ongoing. Any decisions must balance fiscal responsibility with the need to streamline operations and improve efficiency. Once again, given elections, it is doubtful that anything will be announced here as it might imply job cuts.

An SOE issue however that demands urgent attention is Transnet’s operational and financial woes. For some time now private sector involvement has been touted as a potential solution, with the previous announcement of a R47 billion guarantee given to Transnet to enable it to raise funding.

Another contentious proposal has been the potential use of some of the country's gold and foreign currency contingency reserves — amounting in total to around R500 billion — to help alleviate public debt. While tempting, it is important to remain cautious of this option as it is a short-term fix for deeper structural issues, which are of our own making. South Africa must create an investor-friendly climate to stimulate growth and rather reduce reliance on reserve funds — in this case, there is no such thing as an easy out.

Tax hikes also present a looming spectre, with the Minister announcing the need to extract an additional R15 billion of taxes in the medium term budget. But doing so would risk further burdening an already strained populace, which the Minister may not want to do ahead of the polls. Additional tax may also be extracted through less than full inflationary relief from bracket creep.

Overall, the national budget, as always, will be a balancing act between short-term needs and long-term sustainability. The current trajectory of our public debt, especially given the high cost of interest, is a point of concern. It is important then that whatever measures the Minister proposes to fund current expenditure does not come at too great a risk to long term sustainability — or the scales will be further tipped against us.