Medium-Term Budget Policy Statement
Nov 01, 2023
MTBPS: More borrowing this year, along with tax increases during 2024/2025, in response to lower fiscal revenues
Success in public-private initiatives that is meant to address economic growth challenges could improve the country’s medium-term fiscal trajectory
Johannesburg, 2 November 2023 — Minister of Finance Enoch Godongwana delivered his Medium-Term Budget Policy Statement (MTBPS) on 1 November. This speech — and the annual budget speech in February every year — are scrutinised by economists to understand what the medium-term trajectory of fiscal and other public sector indicators is.
There has been increased concern in the last few months over the expected shortfall in government revenues during 2023/2024 alongside a deteriorating macroeconomic situation. In this context, we released the October 2023 edition of PwC’s monthly South Africa Economic Outlook report, which provided forecasts and predictions for key fiscal issues ahead of the MTBPS release. This included estimating the size of the revenue gap and identifying the actions we anticipated the finance minister would take to address this shortfall. (The table below highlights these predictions compared to what was announced by the finance minister in the MTBPS).
PwC expected Minister Godongwana to announce a combination of spending cuts and increased borrowing to fill a substantial gap in revenue collections during 2023/2024. The minister confirmed the revenue gap — currently R56.8bn — which is in line with the income gaps (between R50bn and R70bn) recorded in the three years ahead of COVID-19. In response to the shortfall, the MTBPS announced a small (net R3.7bn) reduction in non-interest expenditure, along with a significant increase in borrowing, to compensate for the rest of the revenue chasm. The 2023/2024 budget deficit (which needs to be financed through borrowing) is now planned at R330.1bn, up R46.4bn from the Budget 2023 figure of R283.7bn.
The R3.7bn reduction in non-interest expenditure is the balance of R29.4bn in upward expenditure adjustments and R33.1bn in downward spending adjustments. The increased costs consist of higher-than-expected public sector wages (+R23.6bn) and larger allocations to provincial departments (+R17.6bn). In turn, spending cuts come mostly from a reduction in baselines (-R21.7bn) across national, provincial and local government, as well as declared underspending of budgets (R3.3bn). For ordinary South Africans, lower baselines and underspending will mean additional pressure on the resources available for (and quality of) basic public service delivery.
Lullu Krugel, PwC South Africa Chief Economist, says:
“Government spending only makes a small direct contribution to overall economic growth. However, public sector expenditure is at the core of economic development and socio-economic upliftment. In addition, public services provide the basic hard and soft infrastructure needed by the private sector to grow their business and employment. These are key reasons why the R56.8bn shortfall in 2023/2024 fiscal revenue — and the mitigating measures needed to close this gap — raise concerns about the short-term health of the South African economy.”
The following table reflects some of our key expectations for MTBPS 2023, and compares them to what was actually announced in the statement.
| Topic | PwC expectations | MTBPS |
| Economic growth forecasts | Budget 2023 expected the South African economy to grow by 0.9% this year and 1.5% in 2024. At present, PwC forecasts lower economic growth rates of 0.5% and 1.1%, respectively. Lower economic growth forecasts are associated with:
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The National Treasury expects economic growth of 0.8% this year and 1.0% in 2024. The MTBPS referenced changes in the global economy as well as local challenges to energy and logistics supply as key factors behind the downward revision in its forecasts. At the same time, the statement sets out growth-enhancing reforms that will support higher economic growth — projected at 1.6% in 2025 and 1.8% in 2026 — over the medium term, which are already underway. These include improving electricity supply, increasing freight rail reliability, and speeding up port operations, with support from the private sector. |
| Budget revenue gap | Our October economic report indicated that PwC expected a total tax revenue shortfall of up to R30bn in 2023/2024, based on the latest tax data (up to August 2023) available at the time. However, the most recent September tax data shows that after Corporate Income Tax (CIT) increased 10.4% y-o-y in August, these collections fell by 2.4% y-o-y the following month. This decline was notably worse than expected and, when combined with further slippage on net Value-Added Tax (VAT) collections, suggests to us that the shortfall in fiscal revenues would be at least R45bn. On a positive note, Personal Income Tax (PIT) collections were doing better than expected due to higher-than-budgeted-for public sector wage increases and better-than-expected employment creation in the private sector. | The finance minister has estimated a gross revenue gap of R56.8bn in the current fiscal year due to underperforming CIT and higher-than-expected VAT refunds. On the CIT front, the MTBPS echoed our observation that mining companies are contributing less taxes to the fiscus after the faster-than-expected decline in commodity prices following the 2021-2022 boom. Regarding VAT, the minister noted higher-than-expected refunds due to increased investment in embedded generation and the increasing use of road transport, which is more expensive compared to rail. The minister provided some positive news by noting the better-than-expected performance in PIT collections on the back of a sustained recovery in earnings and bonus payments. |
| Tax buoyancy ratio | The expected tax gap (R45bn) would result in a tax buoyancy ratio of around 0.70 in 2023/2024 compared to a Budget 2023 figure of 1.06. This would be the lowest reading since the global financial crisis. Tax buoyancy measures the responsiveness of taxes to growth in the economy. A reading below 1 indicates that tax revenue growth is lower than nominal GDP growth, signalling weakness in the economy. | This year’s expected revenue of R1.731trn will be 3.2% less than what the National Treasury expected in February. As a result, the tax buoyancy ratio will drop to just 0.61 during 2023/2024 – the lowest since 2009/2010. While the reading is expected to rebound to 1.15 in 2024/2025, this would still be below the long-term average of around 1.30. |
| Narrowing the gap | There are three options for closing a fiscal funding gap, namely: spend less, borrow more, or increase taxes. Minister Godongwana told Parliament on 17 October that “moderate” spending cuts and a “sustainable” increase in borrowing will be implemented to narrow the income gap in 2023/2024. This was our expectation for the MTBPS as well. | The MTBPS announced a net R3.7bn reduction in non-interest expenditure, balancing R29.4bn in upward expenditure adjustments (e.g., higher-than-expected public sector wages) with R33.1bn in downward spending adjustments (e.g., reduction in baselines across all three spheres of government). When adding an updated view on interest spending, the budget deficit will be R46.4bn (16.4%) larger in the financial year. This, in turn, will increase the borrowing requirement. |
| Tax increases | Previous tax rate increases did not translate into the expected additional revenues, with economic conditions only deteriorating further since then as South Africa continues to struggle in a low-growth environment. Also, while Minister Godongwana told Parliament last month that spending cuts and an increase in borrowing will be implemented to narrow the income gap in 2023/2024, he did not raise any warning flags about tax increases at this event. As such, we believed that increasing tax rates would be one of the last options considered by the finance minister to close the tax gap. In addition, the government has never increased taxes in the middle of a fiscal year, and has only ever announced tax increases in the MTBPS for the next fiscal year in exceptional circumstances. Official announcements are usually done in the main budget speech. | No changes were made to tax rates applicable to the 2023/2024 fiscal year. However, the MTBPS warned that the minister will, in Budget 2024, propose tax measures to raise additional revenue of R15bn in the 2024/2025 financial year, starting in April 2024. No detail was given about what these tax measures could look like though the minister said he would aim to limit the negative economic effects. In our view, the least impactful change would probably be a small upward adjustment in the VAT rate, lifting it by 0.5 percentage points to 15.5%. |
| Tax compliance | Adjusting spending and borrowing plans do not remedy the problem the government frequently faces, namely receiving less income than it expects to see. PwC suggested that the most likely response to the need for improving revenues over the medium term would be placing greater responsibility and pressure on the South African Revenue Service (SARS) to improve tax compliance levels. The country’s tax gap (the difference between taxes legally owed and taxes actually collected) is currently estimated to be more than R300bn. | The minister said in his speech that alongside measures to stabilise public finances and reform the economy, South Africa’s most effective way of funding the government is through an efficient tax administration. He indicated that SARS will continue its focus on enforcing compliance in areas such as debt collection, fraud prevention, curbing illicit trade, voluntary disclosures, and encouraging honest taxpayers to comply voluntarily. |
The recent MTBPS revised budget balance ratios. The National Treasury now expects a budget deficit equal to 4.9% of GDP in 2023/2024. This is notably weaker compared to a projection of 4.0% of GDP made in Budget 2023, though better than a median forecast of 5.3% of GDP reflected in a recent Bloomberg survey of local economists. A similar trend is seen for the next two fiscal years: larger deficit ratios compared to February’s expectations but smaller than economists were anticipating. The current forecast trajectory keeps to the long-standing promise of narrowing the budget shortfall over the medium term in order to put the fiscus on a more sustainable footing.
Other notable points relating to the MTBPS include:
- Gross public debt is expected to peak at 77.7% of GDP in 2025/2026. This is the same year as previously anticipated for the debt ratio to start turning around, even though Budget 2023 was aiming for a reading of 73.6% of GDP.
- The R350 Social Relief of Distress (SRD) grant will be extended in its current guise for another financial year, i.e., until March 2025. During this time, the government will undertake a comprehensive review of the social grant system towards a new social security policy and funding model.
Christie Viljoen, PwC South Africa Senior Economist, says:
“The MTBPS has given South Africans more certainty about the country’s fiscal trajectory. However, this certainty is not an overwhelmingly positive factor as it stems from the finance minister announcing reduced spending, higher borrowing needs, and an increase in tax rates during 2024/2025. The only way to sustainably improve the fiscal trajectory is to accelerate the country’s economic and employment growth. This, in turn, will create more taxes and allow the government to channel more funding to its social priorities. Success in the public-private cooperation for fixing the country’s energy, logistics, crime and corruption challenges will be key in realising this accelerated growth.”
