The 2024 Budget – “Staying the Course”

Minister Godongwana secured some interim relief for the fiscus through a R150 billion drawdown from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA), which has increased to over R500 billion mainly because of rand depreciation in recent years. This will reduce the Treasury’s borrowing requirement by R100 billion in 2024/25 and R25 billion in each of the subsequent years. However, it is the balance sheet of the Reserve Bank that will be the main long-term beneficiary of the new arrangements. The GFECRA will in future be distributed first to the Account itself to protect against swings in exchange rates, second to a Reserve Bank contingency account to ensure its solvency and meet sterilization costs, and then once these obligations are settled, funds will go to the Treasury.

The GFECRA relief means that the Treasury now anticipates that the debt-GDP ratio will stabilise in 2025/26 at just over 75%, whereas the 2023 Medium Term Budget Policy Statement projected a peak of around 78%. Debt service costs will continue to rise from R356 billion in 2023/24 to over R440 billion in 2026/27, peaking at over 21% of revenue.

The Budget remains highly debt-constrained, with consolidated expenditure projected to rise by just 4.6% a year, slightly lower than expected inflation.

The Budget Review describes the policy stance as “staying the course,” continuing the fiscal consolidation theme that has shaped the budget framework since 2012.

There are three substantial constraints – slow economic growth, the fiscal costs of Eskom debt relief and support for other state enterprises, and public sector wage settlements that limit room for expenditure reprioritisation. The rising trend in real interest rates adds to the fiscal strain.

The Treasury is “staying the course” in other respects too. Apart from additional allocations for salaries, there is little change in the medium-term expenditure framework from the emphases of recent years.

• The “social wage” makes up 60% of non-interest spending, broadly protecting education, health, and social grants, while continuing to raise allocation for basic services and local government.
• The social relief of distress grant receives R34 billion in 2024/25 and provisional allocations are made for the next two years.
• Allocations to defence, public administration, law courts and prisons, home affairs, and foreign affairs decline in real terms.
• On the revenue side, the personal income tax burden will increase somewhat as adjustments were not made for inflation. The carbon tax rates will continue to be raised and a global minimum tax on companies is proposed, in line with Organisation for Economic Co-operation and Development (OECD) approaches to combating base erosion and profit-shifting. An investment allowance is proposed to encourage electric vehicle production. The excise duties on alcohol and tobacco products have been increased, broadly in line with inflation. The fuel levies again remain unchanged.

The Budget Review is accompanied this year by a Macroeconomic Policy Review, drawing in part on working papers prepared for the UNU-WIDER SA-TIED programme, to which several SALDRU and Development Policy Research Unit associated have contributed.

This is a helpful new publication, both in its clarification of the Treasury’s thinking on macroeconomic trends and choices, and in its invitation to readers and other stakeholders to contribute to “the essential conversations that will be needed to address the challenges” of strengthening growth and improving its inclusivity.

The Treasury takes the view that monetary and fiscal policy contributes to economic development mainly through a sound and sustainable framework that underpins financial confidence, contains inflationary pressures, and avoids risks associated with excessive indebtedness. Although sound macroeconomic policies are a precondition for sustained growth, broader structural and institutional reforms are needed to achieve improved productivity, competitiveness, and inclusivity.

Higher levels of investment, both in public infrastructure and in business capacity and technology, are critical to South Africa’s growth challenge. Initiatives in progress to address the deterioration in Eskom’s and Transnet’s performance and to expand private sector participation in the electricity and logistics sectors are paramount. The Treasury estimates that around R2 trillion in economic activity was lost between 2011 and 2019 because of the weakening performance of Eskom and Transnet. Inadequate capital spending and maintenance of infrastructure by national and provincial government and municipalities have also held back business investment in housing and industry.

The Budget Review outlines “institutional reforms” intended to boost capital investment over the period ahead, including the establishment of an infrastructure finance and implementation support agency and proposed amendments to revive the pipeline of public-private partnerships, simplify procedures for projects valued at below R2 billion, and reduce the risk of project cancellations after they have passed the feasibility stage. Progress in implementing these proposals will have to be watched closely.

The 2024 Budget coincided with another disappointing outcome on the employment front – the official unemployment rate increased in the fourth quarter of 2023 to 32.1%.

It is striking that neither the Budget Review nor the accompanying Macroeconomic Policy Review provide an analysis of employment trends or any substantial discussion of employment policy options.

There is an additional year’s funding for the Presidential Employment Stimulus, but it is accommodated in part at the expense of allocations for other public employment programmes. Industrial and trade policy, agricultural support and infrastructure, housing and community development, tax measures, or labour market reforms that might assist in boosting employment and basic livelihoods are not yet part of the macroeconomic discourse, not even amongst the “structural reforms” highlighted in chapter 2 of the Budget Review. It is hard to see how progress towards a more inclusive growth agenda will be achieved without these and other extensions of the conversation.