Following the retirement of Tito Mboweni, the new Minister of Finance, Enoch Godongwana, presented his first Budget to parliament in Cape Town on 23rd February 2022.
The Budget should be viewed against the background of two years of the Covid pandemic, an exceptionally rapid recovery from the global recession, as well as social unrest in South Africa leading to riots and looting in parts of the country in July 2021.
Highlights
It is suspected that the positive effects of the Budget on consumer spending will be largely offset by higher sin taxes and a rising petrol price. The main points include:
- Tax revenue exceeded the 2021 estimate by R181.9bn.
- Corporate tax was reduced from 28% to 27%, as promised in the 2021 Budget.
- Pension funds are now permitted to invest 45% of their capital offshore.
- For the first time since 1990 the fuel levy was not increased.
- Excise duty on alcohol and tobacco increased by between 4.5% and 6.5%.
- Government now pays grants to over 46% of the population.
- Huge infrastructure spending is ongoing and positive for the economy.
- GDP is projected to grow at 2.1% for 2022 and by 1.8% p.a over the next 3 years.
Medium term plan and fiscal discipline
Long-term planning, consistency, transparency, sound management and execution are all good words when it comes to the evaluation of a country’s finances and Budget.
Fortunately, Enoch Godongwana, in his maiden Budget, has inherited a sound framework as well as a medium-term plan.The speed and intensity of the economic recovery has exceeded everyone’s expectations and the sharp recovery in commodities has been the main reason for the over-recovery in revenue.
The Minister must be given credit for not spending this surplus, but instead using a large portion to reduce the budget deficit. This surplus also gave him the flexibility to reduce corporate taxes by 1%, to keep personal taxes unchanged and to avoid an increase in the fuel levy.
However, when faced with a global pandemic and, more recently, the invasion of the Ukraine by Russia (with the oil price surging over $100 a barrel) it becomes very difficult to execute on even the best-laid plans. Consequently, it may be that a number of risks could affect the outcomes of the Budget in coming years.
Risks
The history of Eskom is well documented, including the loadshedding of recent years. Accumulated debt is now over R390bn and help will be needed to clear this in the coming years.
Last year’s Budget started the process of power generation outside of Eskom and this is now progressing. The government now needs to process licensing rapidly and ramp up repairs and maintenance of existing plants in order to keep the economy growing. With Koeberg units undergoing major refurbishment for this year and possibly into 2023, the risks of further loadshedding remain high. With the private sector coming to the party and renewable energy gaining popularity, we can only hope that we are over the worst.
It was not only Eskom that was mismanaged over many years but also the State Owned Enterprises (SOE’s). R308b has been budgeted to restructure and “bail out” a number of these enterprises and there is talk of the possible sale of some. The poor performance of these SOE’s has hampered the economy for many years and this needs to be corrected as soon as possible. The country’s increasing debt levels have also become a major risk to the financial well being of the country and its ability to borrow at competitive interest rates.
The years ahead
Government debt levels are expected to peak in Feb 2025. Another way of highlighting the debt levels is to express the debt per person. Debt has tripled since 2008 and is equivalent to R69291 per every South African resident. Interest payments have more than doubled to R4278 per person per annum.
The official unemployment rate reached 34.9% in Q3 2021. The expanded definition of unemployment stands at 46.6%. It is not surprising the government extended the monthly Covid grant of R350 for another year. It is only buying itself time to replace the grant with something else and to find a plan to tackle this serious problem and put people to work. Failing that, the riots and looting that we experienced in July 2021 are unlikely to be a one-off event.
Conclusion
Taken collectively or individually, the Budget and the SONA are good documents. If the government can improve on its implementation and delivery, this will be very positive for the economy, but serious risks remain.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.
