Budget preview: Commodity tailwind becoming a tail risk

Sisamkele Kobus, Fixed Income Analyst at Ninety One

Outside of the mining industry, Finance Minister Enoch Godongwana has been the main beneficiary of the commodity cycle as it translated into significantly higher tax collections.

We saw tax as a percentage of GDP climb from 23.8% in FY19 to 25.5% for FY23. This has mainly been driven by an increase in the contribution of mining to company income tax collection.

However, by the middle of last year the over-collection of tax was becoming more broad-based, as the income effect trickled down to other industries. Of course, improved capacity and efficiency at the South African Revenues Services helped but the impact of high commodity prices far outweighed this.

Since the June 2020 adjustment budget, we have seen a cumulative R500bn revenue overcollection to date, when compared to the National Treasury’s expectation at the beginning of each fiscal year. This has helped to provide much required breathing room, and masked expenditure pressures that have been mounting. On the expenditure side we have spent more than R150bn cumulatively since February 2020 to date, versus what was budgeted at the beginning of each fiscal year. The spending pressures include bailouts for state-owned enterprises, further extensions in the social-relief-of-distress grants and wage bill pressures.

The revenue tide is turning
The revenue tide is now turning. We believe that we will start seeing the National Treasury revise their revenue forecasts lower. Commodity prices have reduced significantly since last year and volumes in the mining sector are still quite weak. This should be reflected in lower turnover and tax paid to SARS. The intensity of loadshedding and its impact on GDP growth will also have a devastating impact on tax collection. The South African Reserve Bank has already revised its growth forecasts down by 90 basis points versus their expectation in November 2022 off the back of this loadshedding. We also expect lower growth as a result.

Contrary to what has become the norm, National Treasury will go back to revising revenue forecasts lower. As the commodity tide ebbs, the structurally high current spending and dysfunction of state-owned enterprises will start to challenge fiscal prudence. For now, National Treasury may get away with higher budgeted revenue numbers as we will still overshoot for this fiscal year. However, the best is behind us.

Evolution of revenues budgeted and outcome

Source: National Treasury & Ninety One