Fiscal restraint, coupled with a dire need to resuscitate the economy, meant this would be one of the more challenging budget speeches made by Finance Minister, Enoch Godongwana. 

The budget speech needed to address and prioritise disciplined budgeting, efficient tax collection, responsible spending and sustainable economic growth by promoting a balance between economic growth and development (spending) and easing the burden on South African households in the current high cost of living environment. 

Furthermore, the small matter of an upcoming election in a few months’ time meant that Godongwana had the unenviable task of trying to steer the SA economy to safety whilst still considering potential political ramifications among a disillusioned, hungry population whose votes are becoming more and more important, given the increasingly competitive political landscape in SA.

Taxes, debt service costs and social spending were high on the agenda – especially with rumours of possible VAT increases and the removal of medical tax credits circling. Godongwana, however, was keen to stress that potential tax changes may not lead to significantly increased revenue and that only through sustained economic growth, driven primarily through infrastructure investment, can South Africa improve its weak fiscal position. 
  
   
Key Takeaways
 
Taxes

Despite pressure from government to increase tax revenue, there were no major changes to tax in this year’s budget speech around individuals and personal income tax. 
   
However, there are no inflation adjustments to the personal income tax tables and medical tax credits. This will result in bracket creep – a phenomenon where inflation pushes income into higher tax brackets. The result is an increase in income taxes but no increase in real purchasing power for the individual.

On a positive note, no changes to value-added tax, taxes applicable to trusts, donations and death taxes.

Once again, South Africans can expect an increase on excise duties of between 6.7% and 7.2% on alcohol and between 4.7% and 8.2% on tobacco. 

Sin taxes

On a corporate level, South Africa will implement a global minimum corporate tax, with multinational corporations subject to an effective tax rate of at least 15%, regardless of where its profits are generated. 
    
     
Two Pot Retirement System

• Two Pot system will come into effect on the 1st September 2024.
• From 01 September 2024 contributions to retirement funds will be split into two components. 
  • 1/3 into a savings component.
  • 2/3 into a retirement component (this will be protected). 
• Individuals can withdraw from this savings component. 
  • For existing retirement funds the savings component will receive “seed capital”.
  • The seed capital is the lower of:
    10% of fund value on 31 August 2024 or
    R30 000
• Seed capital will come from the retirement component.
• Pre-retirement withdrawals from the savings component will be taxed at marginal rates.
• One withdrawal allowed in a tax year (minimum withdrawal of R2 000).
• These withdrawals will attract tax.

    
Gold and Foreign Exchange Contingency Reserve Account Reform

The GFECRA captures valuation gains on South Africa’s foreign exchange reserves. Currently, such gains or losses are not settled but are reflected as assets or liabilities on the financial statements of the National Treasury and the Reserve Bank. As the rand has continued to depreciate against the US dollar – making foreign reserve holdings more valuable when reported in the local currency – the GFECRA balance has grown from R1.8 billion in March 2006 to R507.3 billion in January 2024.

This is because it benefits from the rand weakening, which makes government's dollar holdings more valuable.

Under the existing practice, these balances do not qualify for settlement.

A settlement agreement has therefore been proposed between National Treasury and the Reserve Bank and will allocate funds across three “buckets”. 

In the first bucket, GFECRA will retain sufficient funds to absorb exchange rate swings. Failure to do so would create an obligation for the National Treasury to cover exchange rate losses. 
 
Once this arrangement has been fulfilled, funds will be distributed to the second bucket a Reserve Bank contingency reserve to ensure the central bank’s solvency and to pay sterilisation costs to neutralise the interest rate impact. Once the first two obligations have been settled, funds will be distributed to the National Treasury (3rd bucket).
 
Treasury is looking to receive R150 billion over 3 years. This will be earmarked for debt repayments and to reduce borrowing in the hope that we can stabilise our debt quickly.   
- R100 billion in 2024/25
- R25 billion in 2025/26
- R25 billion in 2026/27

The government's borrowings will decline from R553 billion this year to R429 billion by 2026. Gross government debt is now expected to stabilise at around 75% next year –lower than the almost 78% it expected previously.
   
   
Electricity and Logistics

After a year where South Africa experienced more loadshedding than any other preceding it, it is no surprise that the budget recognised that electricity supply remains a major problem to our production. To that end the budget proposed an increase in the limit for renewable energy projects that can qualify for the carbon regime. The current limit is 15 megawatts, and the budget has proposed doubling this to 30 megawatts. 

Eskom remains a significant role player in the industry and an independent review on their coal-fired power stations will be released later this week. 

The budget recognised the importance of private and corporate investment in energy projects and roof solar in improving energy supply. In addition to this, a R2 billion grant has been introduced to further promote the use of smart prepaid meters. 

On the logistics front, Transnet has made the news over the last year for all the wrong reasons and is yet another government institution that has fallen prey to ineffective management. A roadmap has been drafted which outlines the path to achieve a more efficient logistical solution. This plan includes leveraging financial and technical support from the private sector. As very little has been actioned at this stage, the success of the proposed plan and the effectiveness with which it is implemented remains to be seen. 

A R47 billion guarantee facility has been provided to Transnet by government. This will aid in the entity’s recovery and allow them to meet their immediate debt obligations. A similar guarantee was afforded to Eskom previously and likewise comes with conditions. Transnet is required to focus on their core activities and introduce private sector partnerships. 

The partnership with Philippine giant - International Container Terminal Services - should provide a much needed boost in capital and industry expertise, both of which should aid in the Transnet recovery. 
  
  
GDP outlook 

• While Global GDP growth is forecast to increase from 3.1% to 3.2% in 2025, Minister Godongwana forecast a depressingly low 1.3% local GDP growth for 2024. This on the back of a challenging economic climate, lower commodity prices and structural constraints.
• Between 2024 and 2026, growth is projected to average at 1.6%.
• This is South Africa’s core problem - lack of growth means the tax base is not keeping up with the increase in spending. While short term solutions like tapping reserves may paper over the cracks, it is a short-term solution to a far bigger problem: growth.
• The government expects the budget deficit to improve from 4.9% of GDP in 2023/24 to 3.3% by the end of the 2024 Medium Term Expenditure Framework (MTEF) period.

Conclusion

Overall, this budget speech will have mixed public reviews. This was always going to be a challenging budget speech given SA’s dire fiscal position. Some positives were: No increase in fuel levy or Road Accident Fund Levy (although many would view this as a small win and were hoping for some further relief here). Furthermore, the balanced approach to fiscal consolidation in terms of expenditure restraint continues to be a priority. There is, however, a fine line between fiscal restraint and ensuring there is adequate funding for critical services. Debt-service costs will rise from R356.1 billion in 2023/24 to R440.2 billion in 2026/27. As a result of the fiscal strategy, debt-service costs will peak at 21.3% of revenue in 2025/26 and decline thereafter. Godongwana said, “Debt-service costs will absorb more than 20% of revenue. To put this into perspective, spending on debt-service costs is greater than the respective budgets of social protection, health, or peace and security”. The increasing cost of debt is preventing expenditure on long term economic capacity generating initiatives.

Negatives included no adjustments to personal income tax brackets, resulting in ‘bracket creep’.  The big “winners” were the public servants and social wage recipients. Historically government have vowed to tackle the unsustainably high public wage bill, but in the run up to an election, it was predictable that this undertaking would be pushed aside.

South Africans over the years have been extremely pessimistic regarding events like the budget speech. This is mainly due to a severe lack of action or political will in the aftermath of such events. Government often talk the talk but walking the walk is another story entirely. Time will tell if this is simply yet another speech filled with empty promises or if anything will translate into actionable progress.  Given the dire situation we find ourselves in, the presentation of a “more of the same” type of budget is unlikely to result in a change in trajectory for the country.