The Sword of Damocles still hangs by a thread

The glass half empty analysts of the Medium Term Budget Policy Statement (“MTBPS”) will find enough in the Finance Minister’s presentation to feel their views are justified. Forecast revenue for the fiscal year is now expected to be lower than that tabled in the February National Budget while the forecast expenditure is expected to be greater than that estimated in February. These widening “jaws” mean that the consolidated budget deficit for the year has been pushed out to R355bn or 5.0% of gross domestic product (“GDP”) from the 4.5% tabled in the National Budget. Revenue projections for the next two years of the fiscal framework have also been adjusted lower with expenditure projections raised to leave the budget deficit estimates at 4.3% of GDP in 2025/26 and 3.6% of GDP in 2026/27 (from 3.7% and 3.3% respectively). While our sovereign debt was expected to peak in 2025/26 at 75.3% of GDP, the expected peak has been kept to the same year but at a higher level of 75.5%. The economic growth outlook for the year was also trimmed back to 1.1% after the slow start to 2024 that we’ve already experienced (from 1.3% estimated in February) with the average annual growth rate over the next three years forecast at 1.8%.

Finance Minister Enoch Godongwana did, however, provide enough for the glass hall full analysts to feel a little upbeat. The Government of National Unity has continued on the path of fiscal prudence and fiscal consolidation with the budget deficit at least set to reduce over the medium-term expenditure framework. From 5.0% in the current year, the estimated budget deficit for 2027/28 has been introduced at 3.2% of GDP as the budget framework rolls on to the next year. Consumer price inflation estimates have been trimmed lower for all years of the forecast period with CPI expected to be at or just below the 4.5% midpoint of the inflation target range.

The commitment to investing in growth and job-creating infrastructure in partnership with the private sector is immensely positive and National Treasury is looking at mechanisms to facilitate and de-risk the process for investors. The finer details are still wanting but government cannot do it alone and incorporating the capital and skills of the private sector can turn previous grandiose promises of infrastructure development into material growth-inducing projects on the ground. The Minister’s final words of the MTBPS were centred around the issue of South Africa’s grey listing and he noted that the country has largely or fully addressed 16 of the 22 action items that the Financial Action Task Force required to be remediated. There is still work to be done but the progress on the action items is probably more than the market has been imagining.

As highlighted, one can take away both positives and negatives from the MTBPS presentation but the overarching issue remains the level of our outstanding sovereign debt. This is the Sword of Damocles that hangs over our collective head. Years and years of running budget deficits and borrowing to make up the shortfall has left our government debt at a level that could already be considered to be a public debt trap. The minister highlighted the seriousness of the issue when he noted that 22c of every tax rand brought into the fiscus is spent on paying interest on our outstanding debt. Debt-servicing costs at R388.9bn are less than that budgeted for learning and culture (R478.6bn) and social development (R396.3bn) but they are more than what has been budgeted for health (R274.0bn), peace and security (R249.8bn), community development (R264.5bn) or economic development (R262.1bn). For many years, debt-servicing has been the fastest growing item in the budget and it is still considerable at an estimated annual growth rate of 6.9% over the next three years. Only the 7.8% growth rate in economic development expenditure is a faster growing budget item in the MTBPS. The particularly good news is that National Treasury is wholly committed to reducing this debt burden even in the face of low growth and considerable social challenges. Those issues cannot be appropriately addressed with the debt that we have and it remains a structural impediment to our country’s advancement.

National Treasury’s use of the Gold and Foreign Exchange Contingency Reserve Account to kickstart the debt reduction over the next few years (announced in February) shows their resolve to address the problem but this is even more evident with the budgeting of a primary budget surplus over the coming years. This is a tough ask when the country needs so much but for as long as we are giving away almost a quarter of every rand brought into the tax coffers to our lenders, that longer-term permanent improvement in broader prosperity will remain elusive. We could opt to enjoy the good life with unbridled expenditure as Dionysius presented to Damocles but a quick look up to that razor-sharp debt hanging by a horsehair should remind us all of the real priority. It is looking increasingly like National Treasury is feeling the same apprehension that Damocles felt and is opting to remedy the issue albeit that progress will be slow. That can only be good for all South Africans.