File image of Minister of Finance Enoch Godongwana. (Photos: GCIS, GovernmentZA)

The South African Rand rose following the National Budget announcement that showed the government refrained from announcing a significant spending spree just months ahead of an important general election.

The Rand was higher against the major currencies and Emerging Market peers after the government set out spending and tax plans that would see the country's budget deficit peak in absolute terms by 2025/26.

The risk was that the government opted to announce an increase in expenditure ahead of the May 29 election, which could have resulted in downgrades to South Africa's debt ratings and declines in ZAR.

To be sure, the National Treasury still raised its expenditure ceiling to reflect the higher wage settlement reached in 2023.

But while the wage bill remains one of the largest expenditure items, it is projected to grow in line with inflation over the medium term, suggesting no real terms increase.

Image: Nedbank.

The Treasury expects a rebound in tax collections, with personal taxes increasing faster than the other major taxes.

Tax revenue is R56BN lower than Budget 2023 estimates but slightly higher than in the Medium-Term Budget Policy Statement (MTBPS 2023). In 2024/25, personal tax brackets are not adjusted for the effects of inflation at all, raising an additional R16.3 billion for fiscus.

"Higher revenue growth contains the budget deficit, while foreign exchange reserves gains reduce the borrowing requirement," says Isaac Matshego, an economist at Nedbank. "Overall, this was a prudent budget against the backdrop of elevated expenditure needs."

Financial market reactions suggest investors are relieved that the government didn't push for higher spending ahead of the election, which is confirmed for May 29.

Above: Public sector borrowing requirement, image: Nedbank.

The Pound to Rand exchange rate is a third of a per cent lower on the day at 23.78, the Dollar to Rand is a quarter of a per cent lower at 18.86 and the Euro to Rand is down 0.20% at 20.39.

Higher revenue growth helps to offset the effect of higher expenditure, with the National Treasury projecting a lower budget deficit over the MTEF.

In 2023/24, the deficit will likely amount to 4.9% of GDP as predicted in the MTBPS 2023, but then narrows faster between 2024/25 and 2026/27, dipping to below 3.5% over the MTEF.

The Gold and Foreign Exchange Contingency Reserve Account (GFECRA) will be tapped by R150BN between 2024/25 and 2026/27 to lower the amount the government will need to borrow.

The GFECRA is an account at the South African Reserve Bank which captures gains and losses on South Africa's foreign currency reserve transactions.

"Although the National Treasury has once again signalled its commitment to contain the increase of the public debt stock by remaining on a path of fiscal consolidation, they have undoubtedly opted for the easy way out of a difficult situation by utilising the GFECRA," says

"To their credit, they still aim to contain expenditure growth over the next three years," says Matshego.

He cautions that meeting the expenditure targets will require significant fiscal restraint and discipline. "Faster revenue growth will also be crucial to reduce the budget deficit below 3.5% of GDP by 2026/27".