The Minister of Finance, Enoch Godongwana, delivered a budget that although on the surface looked prudent and positive, left some uncertainty.
GFECRA SAVES THE DAY…FOR NOW
The Gold and Foreign Exchange Contingency Reserve Account (GFECRA) was the biggest takeaway of the budget. The Minister announced that Treasury will draw down on its GFECRA account to the value of R150 billion over the next three years, and use those funds to reduce its soaring debt levels. This will bring down the country’s debt-to-GDP (gross domestic product) ratio to 75%. Although better than the 77% reached last year, it still leaves the country in dangerous territory with regards to its debt-servicing costs, which currently stand at around R356 billion per year. This means that debt servicing costs, which make up 20% of the country’s budget, will remain in the region of almost R1 billion per day.
NOT AN ELECTION BUDGET
The Minister did not try and sugarcoat the numbers, but rather noted some key areas where Treasury is trying to make an impact. The biggest positive coming out of the 2024 budget is that government seems committed to public private partnerships (PPPs) which appear to be becoming ANC policy in correcting infrastructure challenges, especially in relation to Transnet and the country’s other network industries.
The Minister also addressed the issue of under-performing municipalities and the government’s intention to help “reform them into engines of growth”. However, it must be noted that he was short on any detail as to how this will be achieved.
In line with the global trend, over the next few years, government is also implementing a global minimum corporate tax on multinational corporations with annual revenue exceeding €750 million. These companies will be subject to an effective tax rate of at least 15%, regardless of where their profits are generated.
To encourage the production of electric vehicles (EV) in South Africa, the government is planning to introduce an investment allowance for new EV investments, beginning 1 March 2026. This will allow EV producers to claim 150% of their qualifying investment spend on electric and hydrogen-powered vehicles in the first year. The incentive will be implemented in addition to the existing support under the Automotive Production Development Programme.
THE RISK IS IN THE NUMBERS
The major risks coming out of the speech were assumptions around the budgeted numbers. The budget is contingent on Treasury’s estimates of global and local economic growth numbers, which were more optimistic than what we believe will be the likely outcome.
The speech also provided little clarity on issues around the future of the National Health Insurance, the COVID-19 Social Relief of Distress Grant, and the increasing public sector wage bill; all of which could potentially have a negative impact on government expenditure going forward, if not properly accounted for.
In addition, government has provided Transnet with a R47 billion guarantee facility to support the entity’s recovery plan and meet its immediate debt obligations. While not a guaranteed payment, there was no mention of how Transnet was going to positively transform itself, implying that this line-item could become a reality in a future budget, as government will need to fulfil its guarantees on Transnet’s debt.
TAXES
When it comes to personal income tax, there was no mention of a wealth tax, which is good news for Citadel clients. However, a notable omission in the speech was the lack of inflation-adjustments to the tax tables, meaning that many could feel the pain as their inflation-related salary increases push them into a higher tax bracket. Medical tax credits have also not been adjusted for inflation.
The Minister noted that the two-pot system for pension fund reforms will come into effect on 1 September 2024. We have recently shared a webinar and a detailed article about the changes.
MARKETS RESPOND POSITIVELY
The markets have initially responded positively to the 2024 National Budget speech, but we believe Treasury is simply attending to short-term issues. The actual structural issues that are hampering economic growth, employment and investment have not been addressed, and Treasury is simply kicking the can down the road, again.