By Ricardo Smith
On the 23rd of February, Finance Minister Enoch Godongwana tabled the 2022 South African National Budget in which he touched on all the key economic issues, including fiscal consolidation, state-owned enterprises (SOEs), debt stabilisation and economic growth - including some much-welcomed tax relief.
The 2021/22 budget deficit has improved from the 7.8 percent projected in the October Mid-Term Budget Policy Statement (MTBPS) to 4.7 percent currently. The narrowing of the budget deficit is mainly due to higher tax revenue, on the back of strong corporate profitability, particularly in the mining sector, which has benefited from elevated commodity prices. Notwithstanding the emphasis on fiscal consolidation, the budget deficit is expected to moderately widen to 6% in 2022/23 due to higher interest costs before beginning to narrow to 4.8 percent and 4.2 percent, respectively, over the next two years thereafter.
While much of the most recent budget deficit has been due to fiscal support amid the economic recession brought on by the Covid-19 pandemic in 2020, it is important to note that the fiscus has been in deficit since the global financial crisis of 2008. This has resulted in the cost of servicing debt being among the fastest-growing expenditure items alongside the wage bill, which is the largest expenditure item.
To fund this deficit government has issued bonds, resulting in significant debt deterioration. Government debt-to-GDP levels have subsequently increased in excess of 40 percentage points to 70 percent currently, and the country has suffered multiple credit rating downgrades along the way.
The rand, over the same period, has deteriorated against the US dollar. It moved from levels below R10 against the dollar to levels in excess of R17 to the dollar at the height of the pandemic and to around R15 against the dollar currently. This has contributed enormously to currency-induced inflation and the loss of our purchasing power. Government’s ability to efficiently allocate capital has also been hindered and constrained by debt, wages, social grants and struggling SOEs, among other issues.
Spending on economic development is essential as it creates future revenue streams for the government, making it a self-funding initiative. However, getting to that point can be difficult as there is a lag between the required spending and the revenue received. It makes it even more difficult once you introduce other competing immediate needs from the budget. Notwithstanding this difficulty, this is a requirement for the country to reach a point of self-sustainability: economic and financial stability and avoid government collapse, as we have seen in other countries that spend more than they earn for prolonged periods of time.
National Treasury currently forecasts real economic growth of 2.1 percent and 1.6 percent in 2022 and 2023, respectively, which is below South Africa’s full economic potential. Given the low economic activity expectations, high levels of unemployment, low consumer spending propensities and cooling commodity prices, Treasury has incorporated good fiscal support measures. These include an inflationary relief through a 4.5 percent adjustment in the personal income tax brackets and rebates, no change in the fuel levy, and a one percentage point reduction in corporate tax.
Furthermore, the forecasted increase in economic development expenditure, containment of the wage bill in real terms, and stabilisation of government debt-to-GDP over the next three years is a positive indication towards much needed fiscal reform. The problem is that we have seen these forecasts before, and the time horizon has been pushed forward too many times for us to simply take them at face value.
What we need to start focusing on as a nation is accountability. When budget items are pushed forward, the Finance Minister needs to table how many times they have been pushed forward, the original dates that were initially set and the reasons behind government missing these targets.
This is by no means enough to install the right behaviour, but it certainly gives a bit more transparency. Overall, certainly a good budget by the Finance Minister, now to see the extent to which government sticks to it.
Ricardo Smith, Acting Chief Investment Officer: Absa Stockbrokers & Portfolio Management.
*The views expressed here are not necessarily those of IOL or of title sites.
BUSINESS REPORT ONLINE