By Lehlohonolo Lehana.
The minister of Finance Enoch Godongwana will need to make tough choices about how the 2023/2024 fiscal revenue gap (which we estimate at up to R30bn) and a more conservative income outlook for the rest of the medium term will be addressed.
Godongwana has been hard at work in recent months trying to make plans for reducing the expected fiscal income gap. This includes guidelines published by the National Treasury in mid-September on cost containment measures for the 2023/2024 fiscal year.
This, in turn, followed the National Treasury issuing a letter in late-August to national government departments and provincial treasuries advising accounting officers and authorities “on specific measures required to achieve much-needed savings and prevent the materialisation of potentially crippling resource constraints” in the latter part of the fiscal year.
However, monthly government income and spending data up to September indicates that expenditure has continued to grow.
With this in mind, analysts surveyed by Focus Economics expect the budget deficit to grow to 5.5% of GDP this year (median forecast), compared to a Budget 2023 projection of 4.0% of GDP.
However, auditing and consultancy group PwC says that the doom and gloom figures that have been widely publicised over the past few months may be overblown, with more recent data showing a narrower budget deficit on the cards.
But even with a smaller hole in the budget, the group said South Africa is squarely on the back foot: inflation is taking longer to decline, interest rates have increased by more than expected, and GDP growth is slower than initially projected.
“Lower growth is linked to the weak outlook for household finances, which is pressuring consumption spending as well as negative business confidence impacting on capital formation,” it said.
Inflation peaked at 7.8% y-o-y in July 2022. By the time Budget 2023 was released, headline inflation had declined to 6.9% y-o-y, with the National Treasury expecting inflation to average 5.3% during 2023.
However, the headline reading climbed back to 7.1% y-o-y by March and remained outside the South African Reserve Bank (SARB) target range (3%-6%) until May.
More recently, inflation has returned to the SARB’s target range, but it has not settled. In September, inflation ticked up to 5.4% on the back of higher fuel prices – and most economists forecast the 2023 average to be at 5.9% or 6.0%.
Several factors contributed to higher-than-expected inflation, including rand weakness: still-elevated global food price inflation, larger-than-expected fuel price increases, and the adverse effect of load-shedding on supply chains.
“This has resulted in slower disinflation — the decline in monthly y-o-y readings — compared to what many analysts were expecting earlier this year,” PwC said.
Unsurprisingly, the SARB responded to this environment with monetary policy moves, lifting interest rates by a cumulative 125 basis points in 2023 – about 50 bps more than many economists had anticipated at the start of the year.
“This, in turn, has negatively impacted the broader economy,” the group said.
While rates have been on hold since July, the uptick in inflation has some economists projecting another possible hike in November, although views are split between that and another hold.
On top of inflation and interest rates, however, South Africa’s economy is also dealing with negatives elsewhere.
Business confidence has not been enough to encourage investment, PwC said; meanwhile, the country’s trade surplus has shrunk from R161 billion in 2022 to R32 billion in 2023.
Global commodity prices have declined, tax collections have come in lower, and concerns have been mounting that the country will face a significant revenue shortfall by the end of the financial year.