This was the best budget under the circumstances: No main tax increases, privatising of electricity generation and lowering the budget deficit to gross domestic product (GDP).
Finance Minister Enoch Godongwana delivered his second National main Budget speech since his appointment in August 2021. Just like last year, the Budget surprised everyone, and the Minister could address serious worries of economists, analysts and investors.
The main concerns were:
1. The expected low economic growth will put a burden on tax income and that major tax increases may be announced. This indeed was wrong, as the minister surprised us.
It was expected that low economic growth for 2023 of around 0.3.0% (expectations by the SA Reserve Bank and International Monetary Fund) would affect tax income negatively.
However, Godongwana indicated that the economy would grow at 0.9% in 2023, 1.5% in 2024 and 1.8% in 2025. Tax revenues are expected to total R1.69 billion. This exceeds the 2022/23 budget estimate by R93.7bn. Over the medium term (till 2025), revenue projections are now R6bn higher per annum.
Due to these two factors, there are no major tax proposals or changes in this budget. In fact, the Minister announced tax relief of R13bn.
This includes:
– The refund on the Road Accident Fund contributions for the buying of diesel used in the manufacturing process, such as generators. This will also be extended to manufacturers of foodstuffs.
– Personal income tax brackets will be adjusted for inflation, and the tax-free threshold will be increased from R91 250 to R95 750.
– Medical tax credits will be increased by inflation.
– The lump sum withdrawals at retirement are increased from R500 000 to R550 00.
– Threshold for persons 65 to 75 had increased by 5%, to R148 217 from R141 250.
These proposals, indeed, may keep domestic demand from a fiscal point strong and economic growth may beat expectations.
2. Eskom will put further pressure on the government’s debt. Indeed, it will do so, but the government has made plans in place to soften the burden.
The government will take over Eskom’s debt by a further R254bn, totalling more than R600bn under a government guarantee.
The government intends to privatise generating capacity of Eskom as it will provide tax deductions to households of R15 000 in the coming book year for installing solar panels.
From March 1, 2023, businesses will be able to reduce their taxable income by 125% of the costs in renewables. Over time, renewables may contribute to a smaller demand from Eskom, and old generation power stations may then be closed. The effect on employment at these stations indeed will impose a challenge.
However, the government did not alleviate consumers’ burden, who are facing a massive 18.6% tariff increase of Eskom from April 1.
The worrying factor, therefore, remains government debt and debt financing. Debt servicing costs, as a percent of Main Budget revenue, will increase from 18% in 2022/23 to 19.8% in 2025/26.
Despite these worries, the budget deficit/GDP will decrease from 6.6% of GDP in 2021/2022 to 4.2% of GDP in 2022/2023 and 3.2% in 2025/2026.
Main Budget non-interest expenditure will grow just above inflation in the next two years, and the government’s share in the economy, therefore, will continue to decrease from 32.6% in 2022/23 to 31.2% in 2025/26.
3. The necessary infrastructure Investment is needed to address basic services.
Political parties, private sector, market analysts and economists felt that investment in infrastructure to address supply side constraints and expand basic services must be addressed urgently in this Budget. The Minister indeed took a bold step.
– The public sector will spend R903bn on infrastructure over the medium term.
– Transport and logistics will spend an estimated R351.1bn, including on Sanral, to improve the roadwork infrastructure framework.
– Water and sanitation is allocated R132.5bn over the next three years, mainly by the water boards.
But scepticism remains that these expenditures will be free of State Capture as another R448bn will be spent by state-owned enterprises, public entities and public-private partnerships. Previous experience may prove the sceptics right.
4. Worries over the large government wage bill.
Many believe that the government wage bill is far too high and that it should be cut. The minister however, indicated that the wage bill would grow even more. This is as R45.6 billion is earmarked to budget for the carry-through costs of the 3022/2023 public-services wage increases. Negotiations are still ongoing, but it seems that larger wage increases are on the table.
The Budget also provides additional funding for safety and security, education and health. Despite this, the compensation of employees is expected to increase by 3.3% on average over the next three years.
Overall, Godongwana presented a solid Budget under trying circumstances. The minister abstained from increasing taxes but rather opted to increase debt services cost and total debt through borrowing. How this will affect the opinion of international rating agencies, only time will tell.
Also, the projection that South Africa’s economy will grow at 0.9% this year is rather optimistic. If not, tax income may prove to be overestimated. Only time will tell.
Dr Chris Harmse is the economic consultant of Sequoia Capital management.
BUSINESS REPORT