The budget juggling act

Budgets are always controversial. They’re a function of political battles tempered by economic realities. The South African budget is no less so. In mathematical terms, a country’s annual budget is literally about dynamic optimisation subject to constraints.

Minister Enoch Godongwana’s job will be to do exactly this. The constraints are defined by the size and value of a country’s tax base. A tax base can only grow if the economy is growing in a labour-absorptive and wealth-generating way. The optimisation endeavour is defined by the aggregation of a government’s desires. A government’s aggregated desires are informed by a blend of political expediency and citizens’ expressed demands (depending on the depth of democracy).

There are at least two important points to make here about South Africa’s constraints and optimisation efforts, respectively.

First, our economy is not growing. StatsSA, our public statistics institution, recently reported that the South African economy grew by 0.6% in the fourth quarter of 2024 and by that same amount year-on-year, one of the lowest growth years on record. But our population is growing at 1.5% (at least), which essentially means that in per capita terms we’re going backwards. Worse, the growth figures are driven by agriculture, and there is significant dispute about the credibility of the sector’s figures. Only four sectors grew over 2024, while six contracted. While finance, real estate, and business services expanded by 3.5%, manufacturing declined by -0.5% and agriculture declined by -8%. Mining barely moved.

The bottom line is that without manufacturing expansion that employs a broader segment of the workforce, unemployment will remain doggedly fixed at around 33%. And it is unlikely that we will see growth in labour-absorbing manufacturing unless regulations allow for a more dynamic labour market, and we produce reliable, affordable electricity and transport logistics improvement. While loadshedding has certainly declined over the last year, the fundamental problem is not going away: several power stations need to be decommissioned, and some estimates suggest that we will soon be facing a supply deficit of roughly 5GW (almost a tenth of current installed capacity).

At the same time, we have an abundance of renewable energy that cannot be accommodated on the national transmission grid because it cannot ingest said power. To boot, we are staring down the barrel of inflation-driving electricity prices even while municipal repayment rates to Eskom decline. The economy simply cannot grow unless we sort out this electricity crisis in a hurry.

The second dimension of the constraint is our narrowing tax base. While revenues have increased substantially over the last 30 years (from R113 billion in 1994 to R1.7 trillion in 2023), the SA Revenue Service (SARS) notes that 2023/4 “saw a sharp decline in Company Income Tax (CIT) revenue, particularly in the mining sector.” SARS attributes the loss predominantly to lower commodity prices, but the truth is that the mining sector has suffered close to net zero fixed capital investment over the last decade at least. We cannot rely on it to plug holes in the CIT element of the fiscus. Again, mining sector growth is almost impossible without radically improved electricity availability and affordability, and a more investment-attractive minerals governance landscape.

A closer look at the CIT data reveals that a mere 549 companies (out of a total of 1.16 million companies assess by SARS in 2024) provided 66.5% of the CIT tax revenue. That is 0.2% of companies providing 66.5% of the revenue. Moreover, “the number of individuals expected to submit income tax returns was 7.6 million for the 2023 tax year.” As a proportion of the overall tax base (registered personal income taxpayers are listed as 27.1 million), that is only 30.4% that are liable for actually paying tax. Of the 5.9 million taxpayers that were assessed, however, only 19.4% “earned taxable income above the R500,000 threshold and collectively contribute 74.7% of the tax assessed.”

To put this into perspective, Deloitte correctly notes that “while there has been significant growth in tax collections over the years, a relatively small percentage of the South African population is financing the country’s tax bill.”

Now to optimisation: We have a very narrow tax base of individuals and large companies financing the budget. And that budget is not being spent effectively enough to create broad-based development.

First, far too much of our budget is spent on servicing debt and financing a social wage bill. External debt to GDP (a common ratio to heuristically determine debt sustainability) is close to 75%. That’s normally fine if your economic engine is powerful enough to deliver growth and build up future growth potential. We are not in that situation. Treasury’s 2024 budget review stated: “Rapid growth in debt-service costs chokes the economy and public finances. Debt-service costs now consume one of every five rands of government revenue and absorb a larger share of the budget than basic education, social protection, or health.”

Treasury expects debt servicing costs to rise to R440.2 billion in 2026/27, peaking at roughly 21.3% of total revenue in 2025/26. The next biggest expenditure line item is “social transfers”, which will cost taxpayers in the region of R330 billion in 2026/27. In layman’s terms, that’s over 20 million people reliant on some form of the handout from the state, financed by roughly 1.2 million taxpayers and a handful of large companies paying corporate income tax.

Second, as a new World Bank report spells out in excruciating but succinct detail, our public institutions are ineffective. The upshot is that expenditure is ineffective. Health and education outcomes remain woefully inadequate when measured against expenditure and far more impressive results among our middle-income peers.

Furthermore, “South African policymakers have attempted, often with good intentions, to correct market or historical failures by intervening through hard regulations, such as Black Empowerment policies, local content, and collective labour bargaining—and direct support programmes to specific groups, such as grants, tax rebates, and labour training. Today, these interventions have become so cumbersome that they smother the implementation capacity of the public administration, especially local officials, and open spaces for corruption.”

To generate inclusive growth (or what scholars call broad-based development), the Bank is dead right to emphasise that we must radically increase the impact of public spending. Of course, this has to work in tandem with other interventions. In short, South Africa has an economic growth problem. If we don’t solve it, we cannot hope to make a dent in poverty, unemployment or inequality, all of which are unacceptably high. Inclusive growth is the key to alleviating the constraints highlighted above. But growth will not be unleashed unless we optimise the little spending we have left.