Annabel Bishop: Better-than-expected Budget: mild consolidation on use of GFECRA funds

Investec chief economist Annabel Bishop. Photo: Supplied

Investec chief economist Annabel Bishop. Photo: Supplied

Published Feb 22, 2024


The 2024 Budget saw better fiscal ratio projections to 2023’s Medium-Term Budget Policy Statement ( MTBPS ) as R150 billion of the profits of the Gold and Foreign Exchange Contingency Reserves Account (GFECRA) was used – a methodology followed by many other countries in the world.

The drawdown on the GFECRA account, over the 2024/25 and 2026/27 period, will be used to both reduce borrowings, and so reduce borrowing costs by R30.2bn, which is a larger share of the expenditure budgeted for than basic education, social protection or health.

In November 2023’s MTBPS, gross debt was projected to peak at 77.7% of gross domestic product (GDP) in 2025/26, but it has now dropped to 75.3%/GDP, although still higher than the 73.6%/GDP projected for 2025/26 in 2023’s Budget.

Positively, gross debt is now projected below above 70.0% of GDP in 2031/32 at 67.1% /GDP (the MTBPS had projected it remaining above 70% of GDP), but it is still well above 60% of GDP instead seen as the maximum sustainable debt ratio for an emerging market economy, and the 2023 Budget had it at 65.9%/GDP by 2031/32.

This fiscal year (2023/24), debt is now estimated at 73.9% of GDP, below the 74.7% of GDP in 2023’s November MTBPS, but above February 2023’s Budget projection of 72.2% of GDP.

Overall, the Budget shows marked improvements on the 2023 MTBPS’s projections, made possible by the utilisation of some of the R500bn in the GFECRA, with National Treasury likely dipping into more in future.

The medium-term revenue outlook was revised up by R45.6bn from the 2023 MTBPS projection, and expenditure by R57.6bn. A primary surplus (expenditure less revenue, excluding expenditure on debt servicing) is, however, expected to be achieved his fiscal year, and over the medium term.

The 2023/24 budget deficit remains at -4.9% of GDP projected in the MTBPS, and projected lower in the medium term than in the MTBPS.

The rand has consequently strengthened somewhat, as have bond yields, with the projections also relieving some pressure on the country’s credit ratings.

Specifically, the fiscal deficit drops to -4.5% of GDP in 2024/25 (-4.6%/GDP was projected for this year in the MTBPS), then declines to -3.7% for 2025/26 and then -3.3% of GDP for 2026/27 versus -4.2%/GDP and -3.6% GDP, respectively, in the MTBPS projects for these years. Indeed, the Budget Review notes that “this year, for the first time since 2008/09, government will achieve a primary budget surplus – meaning revenue exceeds non-interest spending.”

On the tax front, no major changed occurred, with no adjustment for bracket creep as a consequence of inflation, with National Treasury consequently raising its R15bn revenue shortfall, as expected.

With 2024 an election year, VAT and income taxes were not expected to be raised, and also not the fuel levy or RAF levy, which is what occurred, and garnered tax relief of R4bn.

National Treasury recognised the weakness of the South African economy, highlighting that any tax “increases could threaten economic growth and prompt negative taxpayer behaviours”.

The Budget did see the normal rise in sin taxes, with the prices of various types of alcohol to increase by between 6.7% and 7.2%, and the types of different tobacco products seeing hikes of between 4.7% and 8.2%.

The Budget did not provide a bailout for Eskom, nor was it expected to, but it did note that Eskom’s prior announced debt-relief programme remains on track to end in 2025/26, with adherence to its strict conditions, with Eskom on track to unbundle into the three separate entities, namely generation, transmission and distribution.

The Budget notes “improved electricity regulations have led to more than R100bn in new private energy generation projects. The solar rooftop tax incentive announced in the 2023 Budget has promoted the installation of solar panels that are now generating 5 200 megawatts of electricity for households and businesses. The severity of load shedding declined towards the end of 2023 and should continue to fall in 2024 due to improved generation by Eskom and independent power producers.”

Renewable energy capacity under construction through the Renewable Energy Independent Power Producer Procurement Programme Bid Window 5 stands at 1 160MW. Changes to schedule 2 of the Electricity Regulation Act (2006) have spurred private investment, with 6 000MW of large-scale projects worth more than R100bn registered with the National Energy Regulator of South Africa expected to become operational in the medium term.

Given the usage of the GFECRA, the government has not projected fiscal slippage in comparison to the 2023 MTBPS, and runs a primary budget surplus instead. In particular, “(c)ompared with 2023 MTBPS estimates, the debt-to-GDP trajectory improves mainly due to a lower gross borrowing requirement – the sum of the budget deficit, maturing loans and the Eskom debt-relief arrangement”. Overall, the Budget is better than expected, with most made of a difficult environment.

Annabel Bishop is the chief economist of Investec.