By Thebe Mabanga
Finance Minister Enoch Godongwana will deliver the Medium-Term Budget Policy Statement (MTBPS) on Wednesday, the second under the Government of National Unity (GNU), but the first fully owned by the coalition.
This follows the drama surrounding this year’s budget, which was delayed until May after a court challenge by opposition parties, including the Economic Freedom Fighters (EFF), over the proposed VAT increase.
Following South Africa’s exit from the Financial Action Task Force (FATF) Grey List, South Africa must now target the seemingly more difficult task of exiting junk status.
Two months ago, Fitch affirmed South Africa’s long-term foreign and local currency debt ratings at ‘BB-’ and maintained a stable outlook.
According to Fitch, South Africa’s credit rating is constrained by several factors, including low real GDP growth, high poverty and inequality levels, a high and rising government debt-to-GDP ratio among other.
“However, the ratings are supported by a favourable government debt structure with long maturities and mostly local-currency-denominated, strong institutions and a credible monetary policy framework,” Treasury said at the time.
Godongwana will now have to show that he has regained full control of the budgeting process and enjoys the buy in of the ten parties in the GNU.
One way to achieve this is to avoid any major baseline spending adjustment, unless its boost areas of spending such as education, health and social welfare.
However, given South Africa’s ongoing fiscal consolidation path since the COVID-19 pandemic, such moves are highly unlikely and would likely face strong resistance from the pro-market Democratic Alliance (DA), a major GNU partner.
The first issue that Godongwana will address is economic growth.
According to the Nedbank Economic Unit, “treasury will likely reduce its GDP growth forecast for 2025 slightly due to shrinking fixed investment and lower exports in the first half of the year.”
The decline in fixed investment should be a major worry for government.
Nedbank goes on to note: “For the next three years, we expect Treasury will reflect an upward trajectory as subdued inflation and lower interest rates sustain consumer spending and easing energy and logistical constraints enable a recovery in fixed investment, offsetting the continued, and potentially deepening, drag from net exports.”
A piece of good news expected to come from the budget is higher tax collection than at the time of the main budget.
The boost is due slightly faster growth in domestic demand, elevated gold and platinum prices, with the former reaching $4 000 an ounce, as well as the ever-efficient tax collection machine that is the South African Revenue Service (SARS).
Nedbank expects revenue to be R60 billion higher and R200 billion higher over the medium term.
A moderate growth in spending following the delayed budget but also low inflation in the years ahead means that South Africa can expect a narrower deficit.
A major issue Godongwana will have to address is that of infrastructure spending.
The government plans to invest R1 trillion in infrastructure over the next three years.
But too often, especially with government owned infrastructure projects, the figures sound like ambitious targets that are not followed through.
Godongwana must disclose how much of planned spending of the past three years materialised.
Actual, not planned, spending is what causes growth and creates job.
Godongwana will then have to respond to a myriad of issues, such as what will happen to the Social Distress Relief Grant (SDRG) after March next year.
The higher-than-expected tax revenue may create room to extend the grant, which was introduced during COVID-19 but has since grown to be an entrenched part of the social fabric due to high unemployment and poverty.
Lastly, the minister is expected to provide an update on discussion with the South African Reserve Bank (SARB) around a new inflation target.
Godongwana will most likely give an update on Treasury’s thinking, since the Reserve Bank’s stance is well known, with the final announcement only expected in next year’s budget, hopefully in February, when South Africa will mark 26 years since the adoption of the inflation target.
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