We were warned
Finance minister Enoch Godongwana warned earlier this year that government departments and municipalities should keep their wage bills under control or face the consequences. This warnings were largely ignored.
With expenditure now rising 9.0% year-on-year – against budget estimations of only 3.4% – the proverbial chickens have come home to roost, and South Africa, as a whole, will suffer for it.
According to an assessment of government finances by economists at Nedbank, South Africa is looking at a massive budget deficit of around R280 billion in 2023/24. Absa noted earlier today that this deficit could climb to R300 billion.
Disturbingly, over the first four months of 2023/24 alone, the budget shortfall totalled R191.1 billion, equivalent to 67.4% of the consolidated budget deficit estimated for the fiscal year.
South Africa’s budget shortfall is coming from both sides of the equation.
Revenues are down, with corporate tax collections dropping sharply in the first four months of 2023/24, dragging total tax revenue on income and profits, while subdued VAT growth contained revenue from goods and services.
Expenditure is up, with the higher-than-budget public sector wage settlement becoming the major drag on the fiscal position, as it raises total spending significantly above budget, while the higher debt service costs are also adding to the pressure, Nedbank said.
In May, Godongwana said that the outcome of wage negotiations with public sector unions was the biggest risk to the country’s fiscal position. He warned that if wage hikes exceeded what was budgeted in February (1.6%), Treasury would have to make difficult trade-offs to find the money to pay for it.
In the end, the settlement with public sector unions for a 7.5% wage increase for 2023/24, well above the 1.6% increase factored in the budget numbers, cost the fiscus an additional R37.4 billion for the fiscal year.
According to the National Treasury, provinces estimate a R24.8 billion overrun on compensation due to the implementation of the wage settlement.
National Treasury has now directed national departments and provinces to contain staff numbers and meet the additional wage spending from baseline allocations, as there will be no additional transfers from the National Revenue Fund.
Reports have also pointed to a host of other cost-cutting measures in the pipeline, including shutting down various government programmes, putting tens of thousands of jobs on the line.
Menawhile, the government is looking to push ahead with major spending plans, including big-ticket items like the National Health Insurance scheme and extending or expanding grants.
Nedbank noted, however, that it’s not only the public wage bill that’s putting immense pressure on the budget.
Debt service costs are another key contributor to the sharp increase in aggregate expenditure, it said.
In the fiscal year to date, interest payments on debt have jumped by 19.3% yoy to R98.2 billion, raised by the higher debt stock and elevated interest rates.
“Although debt service costs rose in line with the budget estimates, equalling 28.8% of the total annual debt service budget, the rapidly widening budget deficit will result in higher-than-budgeted interest payments unless expenditure growth is restricted during the remainder of the fiscal year,” it said.
On the revenue side, over the same four-month period, taxes on income and profits were down by 4% year-on-year, pulled lower primarily by a significant drop in company taxes.
“Personal taxes have held up relatively well, rising by 7.5% YoY compared with 7.6% in 2022/23, boosted by strong non-regular pay (bonuses etc.). Corporate taxes were 19.8% YoY lower in July after sliding by 20.5% yoy in the three months to June,” the bank said.
Notably, the rate of decline in corporate taxes almost matched the slump over the first four months of 2020/21 at the height of the Covid lockdown restrictions.
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