On 23 February, South Africa’s (SA’s) Minister of Finance Enoch Godongwana will deliver his inaugural National Budget Speech amid the country’s increasingly complex fiscal environment. Overall, the 2022 budget is expected to provide fiscal consolidation projections similar to November’s Medium Term Budget Policy Statement (MTBPS). Markets and key credit rating agencies will be focusing on the debt and deficit projections (which were heavily blown out over SA’s years of state capture) and the extent of the damage inflicted from the global COVID-19 pandemic on the national fiscus and, by extension, on the greater South African economy.
Overall, it is likely that fiscal debt and deficit trajectories have improved as only a part of the expected revenue overshoot will be used for increased expenditure given the recent political emphasis and drive towards consolidation. However, investors and financial markets alike will largely remain cautious about the longer-term outlook given only modest traction thus far with reforms to adequately lift trend growth. Furthermore, investors remain wary of the upside risks to the social grant and public wage bill, as well as the execution risk to what remains unusually restrained general spending budgets on the part of National Treasury (NT). Nonetheless, since the start of his tenure, Godongwana has been careful to highlight the risk to fiscal consolidation if this occurs, especially given that revenue overruns cannot be relied on continuously to finance extraordinary or other additional spending pressures. At the end of the day, reasonable fiscal consolidation without a stable, higher state revenue stream requires a shift accelerating current expenditure, with the finance minister having notably highlighted that the local economy is simply too weak for higher taxes.
As it stands, cumulative tax revenue collections continue to perform better relative to NT’s MTBPS expectations. April-December 2021 collections point to a 29.6% YoY increase in total tax revenue. This is compared to NT’s MTBPS estimate for total tax revenue to increase by 18.8% YoY. This better-than-expected performance, while broad-based, has largely been driven by corporate income tax (CIT). The sterling CIT performance is attributed to high commodity prices, which have boosted the profits of mining companies over the period. Nevertheless, investors’ chief long-term concern remains centered around inadequate economic growth which will contribute to a debt spiral. Skepticism remains with regards to whether there is adequate traction with policy reform to sufficiently lift trend growth to ensure debt stabilisation amid elevated social spending needs. Regardless, amidst all these factors and in anticipation of the upcoming tabling of the 2022 budget, the points highlighted below form part of our wish list, or set of ideals, for this year’s budget:
- Taking action against those implicated in wrongdoing at the Zondo Commission.
- No budget reduction for the National Prosecuting Authority (NPA) or, better yet, allocating more money to the NPA, and the Special Investigating Unit (SIU) to fight rampant corruption.
- A demonstration of government’s intention to follow a path of fiscal consolidation, with difficult actions being taken rather than simply words.
- A credible plan that brings debt accumulation under control and where debt levels begin to come down rather than escalating at a slower pace.
- A demonstration of additional measures to improve the ease of doing business in SA.
- Further details surrounding potential liabilities of the Road Accident Fund (RAF), as well as other smaller state-owned enterprises (SOEs), which are currently in distress, including Denel, the Land and Agricultural Development Bank of SA (Land Bank), the SA National Roads Agency (SANRAL), etc.
- Detailed plans to address the financial distress of municipalities across the country.
- The presentation of feasible growth targets that reflect the current economic reality of the country.
- More details surrounding the previously announced reprioritisation within the existing expenditure envelope to fund new spending commitments
- Clarity around the future of the Social Relief of Distress (SRD) grant now that it has been extended once again for another year (to end-March 2023) i.e., will it be expanded into a formal basic income grant?
Whether any of our abovementioned wish list items will indeed come to fruition remains to be seen. There are also plenty of other fiscal-related issues that need to be addressed and this list is by no means exhaustive. Interestingly, the abovementioned points are relatively unchanged from the wish lists we released prior to the November MTBPS (Anchor’s wish list for the November 2021 MTBPS, dated 22 October 2021) and 2021 February budget (Anchor’s 2021 budget wish list, dated 22 February 2021), indicative of the many uncertainties and unanswered questions still present in SA’s fiscal space.
The extent to which new spending absorbs any fiscal windfall is crucial in our view as it would reflect the true commitment of government to fiscal consolidation. Whilst SA’s fiscal situation is beginning to show some green shoots of improvement, overall the situation remains precarious, and the debt service burden is unsustainable – so striking the right balance between providing relief and improving the fiscal prognosis of the country remains imperative.