National Treasury’s (NT’s) 2021/2022 Budget, tabled in Parliament on Wednesday (24 February), was arguably the most important and difficult budget since the dawn of democracy in 1994. South Africa’s (SA’s) fiscal situation remains precarious and the country’s debt service burden is unsustainable, so striking the right balance between providing relief and improving the fiscal prognosis of the country was imperative. Overall, we thought that the budget struck a confident note, and should be viewed in a positive light by financial markets. However, government remains in a tight race to repair its finances and, whilst there has been credible progress, execution risk continues to remain high. A sharp increase in tax payments from mines (predominantly driven by booming commodity prices) and a faster-than-expected recovery in value-added tax (VAT), led to the state earning almost R99.6bn more in tax revenue than it had expected.
The scrapping of a proposed R40bn in tax hikes over four years (as per October’s Medium Term Budget Policy Statement), government setting aside R19.3bn to fund COVID-19 vaccines without introducing any new taxes for vaccine procurement, and the shifting of personal income tax brackets, should provide welcome relief for local consumers and is, in our view, a brave move on the part of government. NT sees a primary budget surplus in 2024-2025 (a year earlier than previously forecast), thus the budget appears to bet on the premise that the current positive commodity cycle will hold for at least 5 years to maintain revenue collection in line with current levels, off the back of the new tax relief measures. However, NT’s revenue projections are constructed on more than just commodity prices – it is a combination of a stronger macro recovery against the backdrop of a very conservative set of budget targets. Overall, these projections are consistent with forecasts for a gradual and moderate rebound in consumer income and spending, but the risks are biased to the downside of this revenue projection, especially for FY21/22, given that there will not be support from fiscal drag.
Notably, government is still emphasising fiscal consolidation via spending curbs (rather than tax hikes), and the desirable shift in the composition of spending (from consumption to capital) continues. Positively, government’s commitment to contain the public sector wage bill remains and new expenditure allocations (mainly for state-owned enterprises [SOEs], the public employment programme, and the temporary extension of the COVID-19 relief-of-distress grant), were in line with our expectations. This is in stark contrast to earlier concerns amongst financial market participants of larger increases in pro-poor spending. In addition, government continued to signal its strong intent on holding the line on expenditure. The new paradigm surrounding SOE support is very real – government has once again stated its reluctance to increase guarantees to SOEs, which are unable to grow revenues and repay their debt. Guarantees to Eskom declined by R10.5bn, while the Land Bank will receive R7.0bn of which R5.0bn will be disbursed in FY21/22 – in line with our forecast. The lack of further bailouts for other problematic SOEs is a huge step in the right direction.
Elsewhere, we view the 1% corporate tax rate cut as fairly neutral – the 27% corporate tax rate is still very high compared to the global average of 23.6%. Notably, SA has dropped in the global competitiveness rankings from around 30 to 90 in recent years. Thus, rather than a 1 % corporate tax rate cut, we should think about spending that money on improving our ease of doing business as that will reap greater long-term rewards for the country.
Overall, NT has done as much as it can at this stage to beat back any further ratings downgrades within the short- to medium-term, although ultimately this will depend on the execution of this fiscal strategy and the implementation of growth reforms. The Budget Review reports encouraging, albeit gradual, progress with the turnaround at the SA Revenue Service (SARS). However, general SOE reforms (outside of progress with energy reforms), remain frustratingly slow. Only time will tell if progress with proposed growth reforms augment with the necessary fiscal consolidation to ensure SA’s debt stabilisation.