Minister Of Finance, Enoch Godongwana's Highly Anticipated Annual Budget Speech

23 Feb 2024

On Wednesday, 21 February 2024, Minister of Finance, Enoch Godongwana, presented the highly anticipated annual budget speech. Godongwana acknowledged the significant challenges facing the 2024 budget, given the country's substantial budget deficit. In the Medium-Term Budget Policy Statement (MTBPS), he highlighted a current revenue shortfall of R57 billion for the current tax year and R54 billion for 2024/2025. Addressing this financial gap presents a dilemma, as both budget cuts and tax increases pose risks and are politically sensitive in an election year.

South Africa's economic environment has been further strained by issues such as load shedding, inflation, and high interest rates. Load shedding continues to hinder economic growth. As a result, stakeholders eagerly awaited the budget speech for the government's plan to stimulate economic growth and investor confidence. The budget speech covered several key points:

• Personal Income Tax: No major changes were made, and tax brackets will not be adjusted for inflation.

• Investments: Capital Gains Tax and dividends tax remain unchanged.

• Economic Outlook: GDP growth is forecasted at 0.6%, down from the 0.8% estimate in the MTBPS. Total government debt is expected to peak at 75.3% of GDP in 2025/26, with the budget deficit for 2023/24 estimated to worsen from 4% to 4.9% of GDP. A net reduction of R80.6 billion in non-interest expenditure is planned over the medium term. Inflation was recorded at 5.3% in January 2024, with a prime rate of 11.75%, though rate cuts are anticipated in the second half of the year.

• Spending: There will be no increase in the general fuel levy. Alcohol taxes will rise between 6.7% and 7.2%, while tobacco taxes will increase by 4.7% for cigarettes and cigarette tobacco, and by 8.2% for pipe tobacco and cigars.

NOT ENOUGH PIE TO GO AROUND

“Godongwana’s budget, shows that the government is a dab hand at redistributing the ‘national pie’ — but falls woefully short when it comes to growing said pie. Indeed, the government’s policy path has placed a hard cap on the country’s growth and job creation potential since at least 2007/08”. Wrote Chris Hattingh, Executive Director at the Centre For Risk Analysis, in the CRA’s latest Macro Review, which unpacked the 2024/25 National Budget and identified the long-term risks to South Africa's public finances. 

“With the National Treasury forecasting an average GDP growth rate of 1.6% between 2024 and 2026, the economic hardships of South Africans are likely to persist over the short-to-medium term. Debt-service costs continue to depress all other public spending; the debt-to-GDP ratio is optimistically expected to peak at 75.3% in 2025/26, and for 2023 the deficit is estimated at 4.9%. 

That the deficit is fuelled by government consumption rather than new capital or infrastructure investments highlights that the answer to solving South Africa’s economic and fiscal woes does not lie in simply increasing spending. 

The debt burden is exerting ever-greater pressure on the overall budget. Debt-service costs for 2023/24 amount to R356 billion, or R1 billion per day. More than 20% of revenue is used to service debt, larger even than spending on social grants. Some R150 billion worth of South Africa’s gold and foreign currency reserves will be used over the next three years to help reduce the gap between revenue collection and expenditure. Now that the door has been pushed open, the temptation to tap the R507 billion Reserve Bank Gold and Foreign Exchange Contingency Reserve Account again in the future will linger. 

When it comes to state-owned entities (SOEs), Transnet receives a R47 billion ‘credit facility’. A large risk here is that despite solemn promises that said facility is contingent upon strict terms and conditions being met, the possibility remains that said conditions will not be enforced. This would then continue the trend of pouring state resources — ultimately reliant on tax revenues — down unproductive holes. In the past three years alone, the government bailed out six SOEs to the tune of R281 billion. 

The National Health Insurance (NHI) has been nudged into motion. Of the total R848 billion allocated to the Department of Health, R1.389 billion is earmarked for the NHI. While rolling out the NHI will not be an overnight event, the allocation of funds is a signal that the government intends to go ahead with the controversial healthcare programme, even if it takes many years. Downside risks dominate South Africa’s fiscal and economic outlook. 

The hopes and expectations expressed in the Budget speech might come to pass if the small reforms currently on the table materialise, especially in the areas of electricity and logistics. But in an election year, those positive reforms will likely take a back seat. For 2023/24, gross tax revenue of R1.73 trillion is expected, R56.1 billion lower than the 2023 Budget had expected. Following this Budget, individual taxpayers will be under more pressure. 

Personal Income Tax across the board will be raised by not adjusting the tax brackets, rebates and medical tax credit for inflation. Most of the additional R15 billion in taxes which the Treasury plans to raise to help cover its spending needs will be required from individual taxpayers. The small tax base is under more pressure, and so too are the revenues that South Africa collects from exports, due to self-imposed logistics constraints.  

In the current global environment, capital is decidedly risk averse, and more sensitive to geopolitical disruptions. 

Given South Africa’s stance on the 2022 Russian invasion of Ukraine, and over recent months Hamas’ 7 October 2023 attack on Israel, the government might well have given foreign capital another reason to avoid South Africa’s shores. 

The country’s over-reliance on imports of manufactured and complex goods, combined with a great need for foreign capital, places the country in a particularly fragile space. To give the Minister of Finance, his colleagues at the National Treasury, as well as people working at the South African Reserve Bank credit, some of the right words and paragraphs of fiscal responsibility were written. The goal of a fiscal anchor is particularly positive. 

But South Africa’s fiscal story for the Zuma and Ramaphosa administrations makes for concerning reading. 

In his speech, Mr Godongwana referenced President Cyril Ramaphosa’s 2024 State of the Nation address in which he quoted democratic South Africa’s first president, Nelson Mandela, ‘…after climbing a great hill, one only finds that there are many more hills to climb.’ Given the successive self-inflicted wounds that consecutive administrations have inflicted upon themselves and the country, the short-to-medium term outlook points to continued difficult decisions and a tight balancing act.” ~ Chris Hattingh

*With a special focus on trade, investment, and economic matters, as well as foreign policy, Chris serves on the Executive Board of the Global Trade and Innovation Policy Alliance, sits on the advisory council of the Initiative for African Trade and Prosperity and holds the position of Senior Fellow at African Liberty. Chris holds an MPhil (Business Ethics) degree from Stellenbosch University. In his role at the CRA, Chris leads strategic engagements and briefings to clients across South Africa, as well as globally.