Taxes, grants and load shedding: Daunting task for Godongwana with 2023 Budget

Finance Minister Enoch Godongwana faces a daunting task when he delivers the 2023 Budget on Wednesday. He will have to fill in the blanks left by President Cyril Ramaphosa, who failed to elaborate on Eskom’s debt as well as government’s plans to support economic growth and create jobs during his State of the Nation Address.

Economic research group, Oxford Economics Africa, says we already know that the social relief of distress (SRD) grant of R350 will continue, but with the fiscal cliff looming, fiscal consolidation remains a key requisite for financial stability and in ensuring debt sustainability.

With this in mind, a tax increase might be coming.

“Although government allowed R5.2 billion in tax relief during last year’s budget, announcing higher personal income tax will be difficult to justify, raising the value-added tax (VAT) rate could offer the quickest and most direct support to the fiscus although it will be an unpopular move.”

The group says Godongwana has so far demonstrated pragmatism, but he is also a member of the ruling ANC and bound by its overall policies.

Prof. Andre Roux, economist at the Stellenbosch Business School, says when the minister presented his budget speech a year ago the socio-politico-economic environment was inhospitable. This year is even worse, he says.

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What different groups will hope for

He says the corporate sector and investors will hope for a significant trimming of the budget deficit, a coherent programme of the selling off or privatisation of dysfunctional state-owned enterprises (SOEs), along with policy consistency and implementation, institutional competency and integrity, the further easing of the corporate tax burden, and the end of load shedding.

“SMEs will hope for tax breaks, a relaxation of labour legislation, reduction in red-tape and the end of load shedding, while middle-income households will look out for lower personal income tax rates, a credible and visible anti-corruption plan of action, a less volatile exchange rate and the end of load shedding.”

Roux says organised labour and the unemployed will hope for a significant increase in job opportunities, higher minimum wages and the end of load shedding. Public servants will hope for inflation-linked wage increases, a cessation of retrenchments and the end of load shedding.

“The heavily disadvantaged members of society will be hoping for the extension of social grants, the lowering of VAT, increased spending on education and healthcare, cheaper and more reliable transport and the end of load shedding.”

Jeff Ryan, MD of AWCape, a Platinum Sage business partner for HR, payroll and financial solutions, says it is unlikely that income tax will increase as it would likely to cause a further brain drain of the already diminished tax base.

“Therefore, government will likely look for ways to increase its revenue through indirect taxes, like the fuel levy or sin taxes for alcohol and tobacco products, to fund critical spending initiatives. Overall, I hope that the government does not prioritise revenue collection over the well-being of its citizens and avoids increasing VAT to combat the current energy crisis.”

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Consumers battling to balance their budget

Zandile Makhoba, economist at Liberty, says Godongwana is aware that South Africans are struggling with household finances and he will be sensitive about putting further pressure on consumers. “However, in terms of offering consumers relief, he has little room to manoeuvre because optimising revenue collection is critical under the current circumstances.”

Maarten Ackerman, Citadel’s chief economist and George Herman, Citadel’s chief investment officer, say Godongwana will have to allocate money carefully, putting it where it will make the largest impact in turning the economy around to regain the trust of South Africans.

“We are faced with a zero-growth economy, since the South African Reserve Bank recently cut its estimate for 2023 economic growth to only 0.3%. In this climate, it is vital to develop a budget that will create policy certainty by giving clear direction and outlining specific and attainable targets,” Herman says.

Eskom is in debt of approximately R400 billion and although there has been talk of debt restructuring for the past few years, nothing concrete has been done yet. Herman says we should now get clarity on Eskom’s debt and the way to resolve the now constant load shedding issue.

Herman and Ackerman say business wants a budget that effectively balances government’s financial constraints with its social responsibilities, while also empowering the private sector to participate on a greater scale.

Frank Blackmore, lead economist at KPMG South Africa, wants to see how funding will be allocated to implement various initiatives mentioned by the president, such as the R1.5 trillion for the just transition and renewable energy projects.

“One would therefore expect to see a large increase in the funding allocation towards those capital expenditure projects in the budget where the current proportion of expenditures remained relatively stable around 4% of total expenditure.”

Given the reductions in the potential tax revenues that will be collected over the next few years, emphasis will need to be on reducing the costs of government and the efficient allocation of those revenues to where they will be most efficiently used to service the needs of most South Africans, he says.

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Lower GDP, tighter budget?

Tertia Jacobs, treasury economist at Investec, says she believes that National Treasury’s forecast of 4.9% of GDP deficit could be lower this year due to decreased spending and corporate income tax receipts ahead of target. She expects a lower deficit of 4.5% of GDP.

She says key issues to watch out for in this budget will be e-tolls and how Gauteng could finance its R13 billion portion to be paid to Sanral, firm resolve to start delivering on promises to make the country more attractive for doing business and get public-private-partnerships moving to accelerate infrastructure development.

Jacobs adds that the current slowdown is caused by an escalation of load shedding, which has had a visible effect on many sectors like agriculture, manufacturing and trade.

Dr Elna Moolman, head: macroeconomic, fixed income and currency research at Standard Bank, does not expect any tax or increased social grant spending in the medium term. “We assume the planned debt relief for Eskom to entail five annual transfers of R50 billion each as Eskom needs to increase use of open-cycle gas turbines to alleviate load shedding.”