• A large public sector wage hike, disappointing tax revenue and rocketing borrowing costs have hit government finances.

• This will necessitate large budget cuts and shrinking the state, Treasury said in its latest Medium-Term Budget Policy Statement.

• South Africans can also expect a R15 billion tax increase in February next year.

Treasury has been forced to make painful revisions to the latest Medium-Term Budget Policy Statement, which updates government’s spending plans over the next three years, after its expectations in the February Budget turned out to be over-optimistic.

Government now expects to earn almost R57 billion less in taxes than it previously forecast. Much lower commodity prices (due in part to a Chinese demand) hit mining profits, while load shedding, Transnet’s woes and weak local growth also weighed on other tax income. 

Treasury also didn’t fully budget for a 7.5% public sector wage hike, which has added billions to government spending this year. Some 55 000 civil servants now earn more than R1 million a year.

Concerns about South Africa’s economic and fiscal outlook  along with its greylisting, its controversial relationship with Russia and much higher interest rates across the world  have pushed higher the cost of government borrowing. Investors are now demanding much higher interest rates from SA: government’s weighted cost of borrowing has increased from 8.3% in February to 9.5% in October.

This has increased debt service costs by R52 billion above the budgeted amount. Out of every R5 collected in tax, R1 is now being paid to lenders. Government is now spending more on paying debt that on basic education or on health. Debt-services costs are expected to grow by almost 9% per year.

Government debt is now expected to peak at almost 78% of GDP  from a previous forecast of 73% by 2025/26  and grew at a much faster pace than in most emerging markets.

In response, the medium-term budget set out a number of interventions: 

Tax hike ahead

Treasury is budgeting for a R15 billion tax increase in the February Budget. It has not yet been confirmed what shape it will take - whether it will be a VAT or income tax hike (or a combination), for example. 

Spending cuts

Treasury has already cut budgets for housing and other services in this year, and has warned that government budget spending may be reduced by more than R120 billion over the next two years.  

Spending increases on social development (+2.6%), health (+3.1%), and learning and culture (+3.5%) will be below inflation in this period.  

In the civil service, some positions will be frozen and head counts in `non-critical areas` will be reduced, Treasury officials told News24. 

Big plans to shrink the state

In line with President Cyril Ramaphosa’s pledge in the State of the Nation address earlier this year, government departments and agencies will be reduced and merged, Treasury said, while `outdated and unproductive programmes` will be cut. 

More details will be announced at the February Budget.

New rules and a new Treasury agency for private investment

Treasury announced that it will change regulations and municipal legislation to make it easier for private companies and international finance institutions to invest in South African infrastructure projects, also on a local level. Private investment in electricity transmission infrastructure and upgrades to railway lines, among other projects, will be fast-tracked, said Finance Minister Enoch Godongwana.

The details will be announced in February, but officials say the changes will make it simpler for large international funders, like the so-called BRICS Bank, to allocate money for specific, ring-fenced projects. New mechanisms through which private-sector investors and multilateral institutions can co-invest with government for selected infrastructure projects will be created.

A new support agency will also be established in Treasury to manage a pipeline of projects. 

R350 grant lives on

The Covid-19 social relief of distress grant will be extended for another year until March 2025 at a cost of R34 billion, `while government considers social security policy reforms and a funding model`, Treasury said. It also announced that social grants will see inflation-linked increases in 2024/25 and 2025/26.

Stricter Eskom debt relief 

In February, Treasury announced that it will grant Eskom debt relief of R254 billion over the next two years, subject to certain conditions. But it has now decided to take a stricter liner on the arrangement, converting the loan from interest free to interest bearing `to better reflect the cost of this arrangement`.

New legislation, tabled on Wednesday, also stipulates that the minister of finance may reduce the amount of debt relief available to Eskom if it doesn’t meet conditions. 

Godongwana highlighted that one of these conditions, that Eskom still has to meet, is the sale of its finance company, which funded employee home loans.

Hard line on Transnet

In the next week, Transnet must repay R7 billion in loans to creditors. It doesn’t have the money, but Treasury is not going to provide any guarantees. Instead, it wants Transnet to come to an agreement with its creditors on its own.

While Transnet itself has indicated that it wants some R100 billion in debt relief and funding from Treasury, Godongwana told journalists that:

We are not closing the door (on Transnet), but even if we open it, it is not that wide open. 

No allocation for the NHI

There is no mention of new funding allocated for the National Health Insurance Programme but money will be shifted away from the existing NHI grant to cover oncology services. 

`If the national health insurance policy is implemented, then spending on public health could increase from about 4% of GDP in 2022/23 to 6% of GDP by 2040/41. This increase may require additional spending or revenue measures to ensure sustainability,` Treasury said in the Medium-Term Budget Policy Statement.

Fiscal anchors and debt ceiling

More than a decade ago Treasury introduced a ceiling on how much government can spend in a year. But this ceiling was not binding  and deficits and debt continued to grow. Treasury says additional rules will be introduced to provide an anchor for fiscal sustainability. Details will be provided in the 2024 Budget.

Progress with greylisting 

Godongwana said that the Financial Action Task Force (FATF) noted last week that South Africa has addressed 15 of the 20 technical deficiencies in its legal framework. `However, there is also a significant amount of work that must still be done, particularly with regard to the investigation and prosecution of complex money laundering cases and terror financing, the identification of informal mechanisms for remitting money around the world, and the recovery of the proceeds from crime and corruption.`

Government expects to address all the deficiencies identified by FATF by early 2025