South Africa’s government finances are turning the tide, Finance Minister Enoch Godongwana said on Wednesday.
His maiden budget gave a glimpse of light at the end of a grim fiscal tunnel – with some caveats.
Still, he warned that government debt was dangerous: it has reached R4.3 trillion and is projected to rise to R5.4 trillion over the medium term. On average, 20 cents of every rand collected in government revenue is now being spent on debt repayments, which is crowding out spending on health and basic education.
But the good news was that tax revenue collected for the past year was R182 billion more than budgeted, thanks in part to stronger-than-expected personal income tax collections and VAT – but mostly due to mining companies that benefitted from a boom in commodity prices.
Godongwana said that at least R57 billion of the extra income had already been spent, mostly on assistance to businesses and the South African Special Risk Insurance Association (Sasria) following the civil unrest last year, and he also warned that South Africa can’t count on the mining windfall for much longer.
“The improved revenue performance is not a reflection of an improvement in the capacity of our economy. As such, we cannot plan permanent expenditure on the basis of short-term increases in commodity prices.” Treasury also warned that the mining recovery is moderating, and production is likely to be hit by high input costs, electricity shortages, inadequate rail availability and regulatory uncertainty.
Still, the 2021 tax boon has changed South Africa’s debt trajectory.
Part of the extra revenue will go towards stabilising its debt position. This means that for the first time since 2015, South Africa will reduce its borrowings. This year, it will borrow R135.8 billion less than planned.
This will help to stabilise its debt ratio at 75.1% of GDP by 2024/25 – three percentage points lower than previously projected. The consolidated budget deficit is also now expected to narrow from 6% of GDP in 2022/23 to 4.2% of GDP in 2024/25.
Government now expects to achieve a primary surplus – where revenue exceeds non-interest expenditure – by 2023/24.
“This will bring the period of fiscal consolidation to a close, creating space to reconsider the funding of South Africa’s priorities in a fiscally stable environment,” Treasury said.
For now, however, government is continuing to curb its spending growth at a below-inflation rate of 3.2% for the next three years – with strict restrictions on civil servant wages, in particular.
Some of the highlights in the 2022 budget:
Tax reprieve
This year’s budget brought some welcome news, with the corporate income tax cut from 28% to 27%. Personal income tax brackets have also been adjusted to bring relief.
For the first time since 1990, there will be no hike in the fuel or Road Accident Fund levy.
Hikes in excise duties on alcohol and tobacco were kept in line with inflation (between 4.5% and 6.5%) – from above 8% last year.
From 1 March, the employment tax incentive will also increase from R1 000 to a maximum of R1 500 per month in the first 12 months and from R500 to a maximum of R750 in the second 12 months.
After collecting R1.55 trillion in tax last year, South Africa’s tax-to-GDP rate of 24.7 per cent exceeds previous highs reached in 2007/08 and 2019/20.
Spending priorities
Education and culture will again receive the largest share of the government budget (24%), with the bulk of the spending going towards basic education. Social development (18%) and health (14%) are the other large allocations.
Apart from the almost 11% increase in the cost of repaying debt, the biggest growth in spending (+8.5%) will be on economic development, specifically to address the backlog in the rehabilitation of the non-toll road network. Spending on road infrastructure is expected to grow from R50.4 billion in 2021/22 to R72.7 billion in 2024/25 at an average annual rate of 13%.
Spending in other departments will grow marginally or contract, in line with government’s strict controls on spending. The allocation to Home Affairs, for example, will fall by more than 4%, while police services, law courts and prisons are getting almost 2% more. The budget for defence and state security will rise by 0.8%.
Spending on civil servant wages will increase marginally, from R665.1 billion in 2021/22 to R702 billion in 2024/25, at an average annual rate of 1.8%.
“No provision is made over the medium term for spending increases on compensation above this level. Departments are required to continue adhering to their compensation ceilings and, if needed, reduce personnel numbers to sustainable levels,” Treasury said in the budget document.
Additional allocations of R110.8 billion for this year were made to fund the special Covid-19 social relief of distress grant (which costs R44 billion for another 12 months), bursaries via the National Student Financial Aid Scheme, and the presidential employment initiative.
Some of the other allocations include R3.3 billion to absorb medical interns and community service doctors, and R8.7 billion was added to the Police budget, which will be used in part to appoint 12 000 entry-level constables.
Over the next three years, R440.5 million was also allocated to move the the forensic chemistry laboratories to the National Health Laboratory Service. “This change is intended to improve processing times for laboratory services that support police investigations and judicial processes,” Treasury said.
Tough love for state-owned enterprises
Godongwana persisted with his “tough love” stance towards state-owned enterprises.
He expressed frustration that government pumped R290 billion into Eskom since 2013, but that the utility was in no better position than in 2008. “So, we have got to take hard decisions. They will have to sell assets.”
He said that there will be no blanket support for SOEs, and that they will have to demonstrate that they are meeting specific requirements and serious about cost containment.
Godongwana expressed frustration that more than R308 billion has been directed towards bailing out failing state-owned companies since 2013, while South Africa has reduced spending on frontline services and infrastructure reduced by R257 billion during this time.
“In this budget, we are shifting from this trend, and are restoring our focus on the core functions of government,” Godongwana said.
Government wants to encourage more public-private partnerships (PPPs) – which has declined from R10.7 billion in 2011/12 to R5.6 billion in 2019/20.
“This is partly due to onerous approval processes, especially for small projects, and poor capacity of departments to estimate risk-sharing with the private sector. At the same time, lack of clarity regarding the user-pays principle affects the cost of state guarantees,” Treasury said.
Treasury now wants to create “a PPP centre of excellence”, and set up an expedited approval process be considered for projects below R1 billion in value in the next 24 months.
Tax, spending cuts needed for basic income grant
While the Covid-19 social relief of distress grant has been extended for a year, Treasury warned that “in a context of overstretched public finances and persistently high unemployment, the continuation of such a social transfer must be matched by a combination of permanent spending reductions and tax revenue increases”.
Social grants
Monthly social grants have been hiked by between 1.9%, for foster care grants, and 5% for old age, care dependency and disability.
Bounce-back scheme for small businesses
A new business bounce-back scheme will be launched, Treasury announced. It will consists of two parts, small business loan guarantees of R15 billion will be provided through participating banks and development finance institutions. Government will underwrite the first 20% of loan losses. The eligibility criteria, including the requirement for collateral, has been “loosened”. This mechanism will be launched next month.
Secondly, by April this year, Treasury wants to introduce a business equity-linked loan guarantee support mechanism. -fin24
