Finance minister Enoch Godongwana has delivered a crowd-pleasing, business-friendly budget that uses a larger-than-expected R180bn revenue overrun to provide generous tax relief, achieve faster debt stabilisation and extend social spending.
It’s a “Goldilocks” outcome – neither too hot nor too cold – that SA could hardly have imagined two years ago, as the economy was roiled by the pandemic.
Then, the National Treasury feared that growth would slow by about 7% in 2021/2022, gross public debt would explode from about 60% before Covid to 80% now, and the deficit could spike to 10% of GDP.
Instead, thanks to the commodity boom and SA’s rapid rebound from the Covid-induced recession, which has dramatically boosted tax receipts, the minister was handed an extremely lucky reprieve.
He has not squandered it.
About 45% (R211.6bn) of the accumulated revenue overrun will be saved over the next three years to reduce the deficit, and 55% (R258.3bn) will be spent.
In the coming year, much will go on extending the social relief of distress grant at R44bn. The rest will go on health and education, with an extra R28bn allocated for infrastructure and employment programmes over the medium term.
This is not to suggest that fiscal restraint has been loosened. On the contrary, SA is still headed for a period of severe belt-tightening: consolidated noninterest spending will fall by an average 2.4% a year in real terms over the next three years.
Moreover, public sector wage bill growth is confined to just 1.8% over this period and no further bailouts for state-owned enterprises (SOEs) have been budgeted for.
The upshot of the revenue windfall, combined with ongoing spending restraint, is that the consolidated deficit is now set to come in at 5.7% this year (previously 7.8%) and drop to 4.1% by 2024/2025. The debt ratio is set to stabilise at 75.1% (not 78.1%) a year ahead of schedule, and — if everything goes according to plan — SA should achieve a primary surplus in 2023/2024, a year earlier than forecast.
(A primary surplus — when revenue exceeds noninterest expenditure — is a necessary condition to stop debt from rising inexorably. The last time SA managed this was in 2008/2009, before the global financial crisis.)
‘Turning a corner’
The minister struck a confident tone during the pre-budget media briefing. Appearing at ease in his trademark fedora hat, Godongwana confessed he’d been “a bit scared” on taking up the finance minister’s post last August.
“I’m not as panicky as I was,” he revealed. “I’m relaxed as I’m making this budget that we’ve got the capability to turn things around … So relax … I’m not scared. I think we’re turning the corner.”
Indeed, there is much to celebrate in that the debt trajectory has improved, and social welfare has temporarily been extended, all without the need for any major tax hikes. But, as the minister remarked in his speech, “one swallow does not a summer make”. “The improved revenue performance is not a reflection of an improvement in the capacity of our economy,” he added. “As such, we cannot plan permanent expenditure on the basis of short-term increases in commodity prices.”
The Budget Review stresses this point, making it clear that the Treasury has not deviated from its position that any permanent increase in social transfers will have to be matched by a combination of spending reductions or tax revenue increases.
“In the absence of sustained higher economic growth that supports long-term improvements in revenue collection, any proposals to fund permanent increases in public spending require careful scrutiny,” it cautions.
Several tax increases levied on top income earners over the past five years have yielded disappointing results, it adds, warning that as tax increases multiply, they dampen economic growth, reduce investment, slow employment growth and narrow the tax base as taxpayers change their behaviour.
In short, the Treasury remains wedded to the idea that the best way to support economic growth is through fiscal consolidation that reduces debt servicing costs, and lowers fiscal risk and average interest rates across the economy — not through higher spending, taxation and borrowing.
The Treasury has previously stated its preference for reducing corporate and personal income tax rates over time by increasing the tax base through greater economic growth, employment and enforcement.
The 2022 budget remains true to that stance by offering better-than-expected tax relief.
This includes R13.5bn relief for fiscal drag targeted mainly at middle-income earners; no increase in the fuel levy — a first since 1990 (worth R3.5bn); no increase in the Road Accident Fund levy; and the promised one percentage point reduction in the corporate tax rate, from 28% to 27%.
Trouble ahead?
But Wits economics adjunct professor Michael Sachs is underwhelmed.
“The budget represents another year of kicking the can down the road in terms of fiscal consolidation, taxation and spending,” he says. “All of the difficult fiscal issues will now have to be faced next year because the [extension of] the social relief of distress grant and sharp reduction in compensation budgets haven’t really been addressed.”
As a former head of the budget office, Sachs feels it would have made more sense, in the middle of a commodity boom, to front-load the tax hikes that are coming down the line to fund a likely extension of basic income support and the potential for successive wage bill overruns.
He says the short, sharp shock to public expenditure that was due to take effect in 2022 has now been pushed out to 2023. This will become the crunch year for fiscal consolidation, but the timing doesn’t appear to be fortuitous.
Right now, favourable external conditions, including a positive terms-of-trade shock and historically loose global economic policies, are supporting SA’s fiscal position, investment and growth.
But not only is 2023 the year before a general election; it could also coincide with the dissipation of the commodity boom and tighter global monetary conditions.
Citibank economist Gina Schoeman thinks the Treasury should have saved more of the revenue overrun and is being too optimistic in its assumptions regarding future revenue.
“When you don’t have a track record of reform and growth, and have very volatile commodity prices and a very uncertain world, you should choose a more prudent course for your revenue assumptions and the entire fiscal stance,” she says.
When this picture is overlaid with the fact that SA’s underlying fiscal conditions (very low growth coupled with very high interest rates on government borrowing) are expected to remain in place, SA’s medium-term fiscal outlook remains one of vulnerability despite the near-term improvement.
North-West University Business School professor Raymond Parsons agrees with Sachs that while the broad message of the budget is positive for business and consumers, tough policy decisions — which are badly needed for much higher job-rich growth — were postponed.
“In some ways the budget speech seemed rather like a holding operation, when a little more urgency should have been injected into the decisionmaking,” says Parsons.
“If the economy is eventually to reach the 4%-5% growth level needed to significantly reduce unemployment, more attention must be given now to unlocking the economy’s true growth and employment potential.”
The minister is placing a lot of store on the four-day public sector labour summit, scheduled for the end of March, as an opportunity to discuss restructuring the public sector wage bill.
It would make sense to enter into a multiyear, in-principle deal that indexes wage increases to inflation, rather than have the Treasury continue the practice of budgeting for a three-year wage freeze that has little credibility.
The potential for unbudgeted increases in the wage bill is listed as one of six risks to SA’s public finances in the Budget Review.
Others include additional pressures from new spending priorities (such as basic income support), the materialisation of contingent liabilities from weak SOEs, rising borrowing costs due to higher inflation and global interest rates, and the fact that SA’s government debt redemptions over the next five years will average a staggering R150bn a year.
The largest risk cited in the Budget Review would be a deterioration in GDP growth, resulting in lower revenue and greater calls for fiscal support.
The Treasury has raised its real GDP growth forecasts only slightly from the conservative stance taken in November’s medium-term budget. It now expects growth of 2.1% this year, with an average 1.8% over the medium term, against a below-consensus 1.7% previously.
Asked if these modest projections reflect a lack of faith in the government’s structural reform agenda, the Treasury’s acting deputy director-general, Nomvuyo Guma, says significant progress could be made over the long term if all structural reforms were implemented — “but sequencing and the pace of reform really matter”.
Opinion among private sector economists is divided. Most believe the pace of reform has been too slow, but momentum is building, and all the small, incremental improvements will add up to faster growth over time.
However, a minority is beginning to lose faith in structural reform as a growth catalyst. They point out that the government’s halting, piecemeal approach hasn’t ignited confidence and investment.
What is missing, they say, is any sense that the whole of cabinet backs the reform agenda or embraces the need to free the private sector from inefficient SOEs.
Time for ‘tough love’
Even President Cyril Ramaphosa appears conflicted at times, asserting in his recent state of the nation address (Sona) that SOEs should be strengthened “to play a more prominent and beneficial role” in the economy.
In stark contrast, the International Monetary Fund urges SA, in its annual report on the economy, to reduce SOEs’ large footprint in the economy because their deteriorating performance poses a major obstacle to economic efficiency.
Some SOEs should be liquidated and those retained should operate in competitive markets to allow for the growth of new, productive private firms, it argues. Godongwana apparently agrees, promising “tough love” for delinquent SOEs. “For 13 years we’ve been putting money into Eskom and its performance today is no better than in 2009,” he lamented at the pre-budget media briefing. “It can’t be right. We’ve got to take hard decisions and choices. Eskom will have to sell assets as part of that.” The long-awaited plan to deal with Eskom’s R400bn debt will be unveiled in the coming fiscal year.
Godongwana said the future of SOEs is dependent on their ability to offer value and operate sustainably without fiscal support. Some will be retained, while others will be rationalised or consolidated.
To reduce continuing demands for bailouts, future support will be contingent on cost containment, good management, and other conditionalities. However, the fact that the 2022 budget makes no provision for any further SOE support, other than Eskom, doesn’t mean they won’t be funded, Godongwana said. “It means we’re negotiating tough conditions so, over time, they move off dependence on the state.”
Much the same assurances were given by former finance minister Nhlanhla Nene and, before him, Pravin Gordhan. Maybe it really will be different this time. But economists remain sceptical.
“Today’s budget showed that SA’s public finances are in a better-than-expected shape, but the path to stabilise the debt ratio remains narrow,” says Capital Economics emerging-markets economist Virag Forizs.
“Mounting pressures to provide more fiscal support mean that we think policymakers will increasingly struggle to keep public debt on a sustainable trajectory.”
In short, the overriding concern is that the rest of the government will prove unable to adhere to the Treasury’s expenditure plans or expedite the reforms necessary to boost growth.
Until economists see proof of stronger GDP growth leading to sustainably stronger revenues, while expenditure is held in check, the government’s new, improved debt stabilisation trajectory will remain in doubt.
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