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An election budget but fiscally responsible; some disappointments

22 February 2024 Angelika Goliger, Chief Economist at EY Africa

• Can be seen as a election year budget, but we view it as fiscally responsible, within this context
• No major structural changes in reducing government spending – somewhat disappointing
• Dipping into the GFECRA has only been made possible by prudent management by an independent Reserve Bank in building up reserves since 2006 – shows the benefit of financial responsibility.

Mindful of the challenging economic times, the 2024 Budget is kind to South Africans, with no new major tax increases, the fuel levy remaining flat, and a one-year extension in the SRD grant, as announced by the President in the State of the Nation Address. However, the biggest story out of the Budget is the R150 billion withdrawal from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA), to reduce South Africa’s debt service costs through a reduction in borrowing. Due to the weakening of South Africa’s exchange rate, the value of the reserves in Rand terms increased from R1.8 billion in 2006 to R507.3 billion at the start of this year. The last settlement of this kind was done in 2003, according to the Treasury. Under the critical condition of having a strong legal framework in place to maintain the stability of the account going forward, use of this allocation in the context of reducing national debt is reasonable. As this is only a temporary measure, use of the GFECRA needs to be coupled with managing key expenditure risks going forward and strong economic growth to drive revenue. Reducing South Africa’s debt, and structurally shifting spending from consumption towards investment, will improve the ability of fiscus to support economic growth.

This budget does not announce any new support for State Owned Entities, but focuses on the progress of reforms at state owned enterprises - particularly Eskom and Transnet - with the aim of reducing fiscal risk and driving the government’s broader economic reform agenda. Regarding the National Health Insurance (NHI), despite much public scrutiny and the President stating that he will imminently sign the NHI bill, no allocation has been made in this budget for the NHI, with Treasury officials stating it is still too early in the process to be allocating funding.

On the economic front, the Treasury expects South Africa to have grown by 0.6% 2023 and GDP growth projections have been revised upwards for 2024 to 1.6%, from 1.0% at the time of MTBPS, and expecting to reach 1.8% in 2026. The Treasury anticipates this improved outlook due to be driven by increases in consumer spending as inflation eases, and increased investment in energy infrastructure. The Treasury’s view is relatively more optimistic compared to other forecasters, including the SARB, which projects growth of 1.2% in 2024. There are risks to the downside arising from geopolitical tensions, weaker growth globally and challenges in South Africa’s electricity and transport infrastructure.

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