subscribe Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Subscribe now
President Cyril Ramaphosa will deliver his state of the nation addrress on Thursday. Picture: ESA ALEXANDER
President Cyril Ramaphosa will deliver his state of the nation addrress on Thursday. Picture: ESA ALEXANDER

SA faces a double whammy of a declining tax base and rising government expenditure. That is the uncomfortable situation facing President Cyril Ramaphosa as he prepares to deliver his state of the nation address today and finance minister Enoch Godongwana, who will table his budget speech on February 21.

SA marks 30 years of democracy this year, which provides an important backdrop to the events, putting in stark relief the nation’s remarkable resilience and the journey that still lies ahead.

The SA economy remains under pressure going into 2024, mainly due to supply-side constraints in the energy and logistics sectors. At the same time, government spending is spiralling out of hand thanks to factors including irregular and wasteful expenditure, an increasing public wage bill and a growing need to provide more extensive social welfare.

Revenue has fallen while the government is being urged to extend social grants — a recipe for disaster if not the ingredients for a perfect fiscal storm. Real GDP growth for 2023 is expected to fall below even the National Treasury’s forecast of 0.8%. The outlook for 2024 and beyond has also been moderated and is dependent on the (historically) slow pace of structural reforms, largely to address the record levels of load-shedding experienced during 2023. Real GDP growth is forecast at 1% in 2024 and, on average, only 1.4% a year between 2024 and 2026.

That doesn’t compare well with the IMF’s 4% growth projection for emerging and developing economies, and even falls below the 1.7% outlook for advanced economies. The absence of, or abysmal, growth means low tax collection, among other things. Revenue collection is already prickly as the economy struggles to achieve the desired levels of growth, in addition to record-high unemployment.

Balancing act

When delivering the medium-term budget policy statement last year, Godongwana indicated the government was projecting a shortfall in tax collection for the 2024/25 tax year. He said in November last year that tax measures aimed at raising additional revenue of R15bn during the 2024/25 tax year would be implemented.

With economic growth under strain and the taxpayer’s purse stretched, Sars and the National Treasury, must balance increasing tax collection with avoiding crippling the economy or taxpayers.

Still, there are measures available to avert the further deterioration of SA’s fiscal position; for example government undertaking a substantial cost-saving exercise. However, that may not be feasible in an election year, and it is a route the government has historically avoided. In addition, it is one that may not be palatable generally if it means job cuts in the public sector.

In the past, the idea of reducing the size of the national executive has been mooted. That might mean a far smaller layer of ministers or doing away with deputy ministers. Running the national executive, including ministers and their deputies, is a big ticket, and serious money could be saved from that alone. The idea of rightsizing the cabinet has many proponents.

In general terms, it is easy to believe there will be no appetite for belt tightening in areas that matter. However, the finance minister could end up tinkering here and there. In the absence of deep cuts, government borrowing will continue. The problem with an environment that includes increasing costs and expenditure, plus the debt spiral, is that the affordability of anything will be problematic.

Tight spot

It is more than just the national government that is in a tight space; that picture cascades through all the layers, with most public entities facing the same issue. The broad problem is epitomised by the struggle of state-owned enterprises, (SOEs), several of which will be looking to the finance minister for more than just a helping hand as they do not have the balance sheets to allow them to invest in the required growth-driving capital projects.

Bailing out a struggling SOE creates a perpetual problem in that it invites others to make similar pleas. Given the tight financial position that the national government finds itself in, public-private partnerships (PPP) are crucial to stabilising ailing SOEs. The private sector has a definite appetite because that is in its interests since it is losing money in the present environment and cannot operate efficiently.

There is likely to be movement from the government’s side in preparing the ground to enable the growth of PPPs by laying out enabling policies and regulations — equity injections alone aren’t sufficient.

In addition to financial support, the introduction of what the government calls  “strategic equity partners” is required. Private sector players can help state companies shore up their balance sheets, giving the entities some room regarding operational expenses. Private players can also bring in expertise, both managerial and technical.

Investors and the entire SA population will be looking for signs that reforms could be kicked up a notch against a tough climate. The need for continued progress on structural economic reforms, specifically in the energy and logistics sectors, is more urgent than ever. The economic cost of failure and inefficiency in these sectors has mounted over the past year, partly due to a lack of investment but as a result of mismanagement, corruption, and even theft.

Reforms in the energy sector — including lower restrictions on self-generation and reforms to encourage private investment — are expected to add more than 11GW of renewable sources to mitigate the power crisis in the medium term. With the energy supply crisis continually weighing on economic growth, these reforms must continue to be implemented to curb power cuts, unlock investment and get the economy back on course.

The already gloomy picture could worsen if the pace of reform remains sluggish.

• Kubeka is Africa tax & legal MD, Marais SA economic advisory leader and acting chief economist, and Tshesane a director and Africa public services industry leader, at Deloitte Africa.

subscribe Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
Subscribe now

Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.

Speech Bubbles

Please read our Comment Policy before commenting.