There was plenty of nervousness and trepidation associated with this years Budget Speech. The country is facing tough economic times associated with the Covid-19 Pandemic with the future outlook for economic growth well below the 3% that the International Monetary Fund says South Africa must achieve in order to make any headway in addressing the country’s unemployment crisis.
It seems as if Finance Minister Enoch Godongwana was upbeat about the country’s economic performance and is confident about the future prospects that South Africa can look forward to in the future. Alexander Forbes provides a summery of the 2022 Budget Speech below.
Significant improvement
The 2021 Budget has been tabled within an uncertain macroeconomic environment, with global economic growth moderating, advanced economies’ inflation rising to multi-decades, major central banks expected to hike interest rates, and oil prices rising on the back of Russia on a war stand-off with Ukraine.
Despite these lingering risks, the 2022 Budget is a significant improvement compared to both the 2021 Budget and the 2021 Medium-Term Budget Policy Statement (MTBPS) from several perspectives. This improvement was also reflected in the lunch packs we were served in the lockup, an assortment of chicken cooked in three different styles, beef, and prawns. Still, not quite the buffet of pre-Covid-19 but this year’s menu is a marked improvement to last year’s lunch bars.
Photo By: GCIS
Improved macroeconomic environment
Real economic growth is marginally better in the 2021/22 fiscal year and remains unchanged over the Medium-Term Expenditure Framework (MTEF), which is the three fiscal years the budget covers beginning from 2022/23. For the fiscal year that ends in March 2022, economic growth is estimated to have accelerated to 6.0% from 5.4% projected in the 2021 Budget and averages 1.8% over the MTEF (Figure 1). Nominal GDP growth, which closely reflects corporate profitability and influences tax revenue collections, accelerated by 12.3% y/y in 2021/22 but is expected to moderate to an average of 5.0% over the MTEF. Strong economic growth from South Africa’s trading partners and higher commodity prices explain much of the growth performance. However, this external environment is also one of the big risks to South Africa’s growth over the next three fiscal years. The size of the economy has also been revised up nearly R900bn in nominal terms, largely due to last year’s revision and benchmarking of National Accounts, and to an extent a faster recovery in economic growth.
One of the silver linings in the economic recovery from the Covid-19 pandemic relative to historical economic shocks such as the 2008 Global Financial Crisis (GFC) or the 1997 Asian Crisis is that economic growth is recovering faster post Covid-19 than during other economic crises.
Like in the rest of the world, the 2022 Budget is tabled in an environment of rising inflation, which is estimated at 5.1% y/y in the fiscal year 2021/22 compared with a previous estimate of 4.2% y/y in the 2021 Budget. Inflation averages 4.5% y/y over the MTEF, only marginally higher than the previous forecast of 4.3% y/y.
The risks to this economic outlook include rising global interest rates, high oil prices, higher domestic electricity prices, and slow implementation of economic reforms that will delay private sector investment.
R182bn more tax revenue collections for 2021/22 and R468bn better projected over MTEF
Driven by strong commodity prices and global growth, tax revenue collections are estimated to outperform 2021 Budget estimates by R182bn, about R16bn more than our expectations of R165bn outperformance (Figure 5). This equates to R62bn more compared to the 2021 MTBPS estimates. Over the MTEF up to 2023/24, tax revenue collections are now expected to be R468bn more than what was expected in the 2021 Budget
The improvement in revenue collections was mainly supported by the mining sector profits which leveraged off the favourable commodity prices and global demand for mining exports. As a result, corporate income tax (CIT) improved by R105bn more compared to the 2021 Budget against our expectations of an R100bn improvement. Personal income tax (PIT) was the second-highest upward revision, with R38bn improvement compared with last year’s budget and R2bn lower than our estimate. Tax revenue collections improved across other revenue types as shown in Table 1 above. Both the commodity price performance and improved efficiency of the South African Revenue Service (SARS) in collecting taxes following institutional improvements have supported overall tax revenue collections.
Tax relief amounts to R5.2bn which is largely employment tax incentive and no adjustment to fuel levy
National Treasury followed through with its promise to reduce the corporate income tax (CIT) rate from 28% to 27%, which will provide tax relief of R2.6bn in 2022/23. Although the magnitude of this CIT reduction is small, it provides a clear signal that government is on course to reduce the burden for businesses. However, there are new restrictions of assessed losses and additional interest limitations which will generate an equivalent R2.6bn such that the impact of the reduction in the corporate income tax is neutral on revenue. The biggest tax relief goes to ordinary South Africans, who for the first time since 1990, will not have to pay additional general fuel levy compared to last year. The relief from not adjusting the fuel levy amounts to R3.5bn. Excise duties on alcohol and tobacco increase by a combined R0.5bn. In line with improving incentives for corporates to employ young people, the employment tax incentive has been expanded by a further R2.2bn.
These tax relief measures come at a good time when households are facing rising inflation and increasing interest rates. National Treasury and the Department of Mineral Resources and Energy (DMRE) are also reviewing the levies and the general pricing of fuel with the outcome to be announced in future budgets.
Unavoidable expenditure overruns from wages and the extension of Covid-19 relief grant
In line with the President’s State of the Nation Address (SoNA), the social relief of distress (SRD) grant of R350 per month has been extended for 12 months to the end of March 2023 at a cost of R44bn. This is augmented by an increase at the old age, war veterans, disability, and care dependency grants, which will increase by R90 in April and a further R10 in October 2022. The foster care and child support grant will increase by a once-off R20 in April this year. The combined spending on social assistance increases by R14.6bn, when combined with the SRD takes the social assistance spend to R58.6bn in 2022/23, which also includes inflationary adjustments. Over the MTEF, the cumulative expenditure overrun is R227.4bn, with the largest proportion accounted for social welfare of R88bn and free education of R57bn (Figure 8). The effective proportion of South Africans who receive grants is now more than 46%, potentially one of the most extensive social support in many countries.
Regarding the higher-than desired increases in the public sector wage bill, National Treasury has allocated R20.5bn for the 2021 public sector wage agreement. Beyond this, government employees’ salaries will rise by an annual average of 1.8% until 2024/25. In this budget, government wage increases present the biggest risk to the consolidation path in that government might not be able to reach an agreement with labour unions aligned with the budget provisions.
Stabilising public deficit
While the significant growth in tax revenue has improved the budget ratios over the Medium Term Expenditure Framework (MTEF), prudent spending is still necessary if the government is serious about reducing the budget deficit. The debt-to-GDP ratio increases from 69.9% of GDP in 2021/22 to a peak of 75.1% of GDP in 2024/25, which is lower than the previous peak of 78.1% of GDP projected at the 2021 Budget. The consolidated fiscal deficit improves to 4.2% of GDP in 2024/25 from 5.7% in 2021/22, lower than previous estimates. This will result in reduced bond issuance that should be positive for bond yields and bond prices. However, the concerning issue is that interest payments continue to increase over the MTEF.
Several issues are also obvious from the budget
- National Treasury’s expenditure ceiling and primary surplus are no longer credible fiscal anchors as the targets have been missed historically. There is a need for more credible fiscal anchors, the most being how the government will establish a credible and predictable wage settlement regime. There is a need for a new compact between government and labour on wage settlements.
- Personal income tax brackets adjusted by 4.5%, in line with inflation, which implies that the annual tax-free threshold for a person that is younger than 65 increases from R87 300 to R91 250. This provides income tax relief of R13.5bn to South Africans.
- Medical tax credits will increase from R332 to R347 per month for the first two members, and from R224 to R234 per month for additional members.
- The employment tax incentive will be extended through a 50% increase in the maximum monthly value of R1500.
- Fuel levies will not be increased, providing relief of R3.5bn.
- No increase in the Road Accident Fund levy
- No announcement on the two-pot system, more work and consultations are still required with outcomes announced by mid-year.
- Cross border tax treatment of retirement funds is being reviewed following evidence that showed that multiple tax treaties need to be reviewed to ensure that South Africa retains taxing rights on payments from local retirement funds.
The truth is that South Africa is desperate for long-term sustainable economic growth and employment, which must be driven by among other things, increased infrastructure investment. Thus, the emphasis by the finance minister on accelerating infrastructure investment is vital in luring investors and the private sector to fully participate in the economic recovery.
