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The upcoming 2022 budget is the most significant ever after President Cyril Ramaphosa’s State of the Nation Address (Sona) that contained positive signs of a change in policy direction as well as timelines.
The focus now shifts to Minister of Finance Enoch Godongwana, who will deliver his first budget speech next Wednesday. Will he show some of the “tough love” he mentioned in his mid-term budget policy statement (MTBPS) for the state-owned entities (SOEs) and let go of underperforming ones that are no longer considered strategically relevant?
Research group Oxford Economics Africa says Godongwana will have little space for fiscal manoeuvring in the 2022 budget, with more pressure on the fiscus as South Africa consistently spent more than it received in tax revenue. Instead of translating into higher economic growth, this caused public debt to balloon. This means government spending must be cut as there is limited space to raise taxes to boost revenue growth.
The extension of the social relief of distress (SRD) grant until March 2023, announced during Ramaphosa’s Sona, was probably the best outcome given South Africa’s fiscal constraints because more consultation is needed before locking us into such large expenditure, the group says.
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“In the context of weak economic growth and poor service delivery, South Africa’s relatively high corporate- and personal income tax rates place undue pressure on taxpayers. South Africa’s high unemployment rate and shrinking tax base also make for a nasty combination given the economy’s weak growth outlook.”
While corporate income tax was boosted by a commodity price windfall last year, Godongwana already said in the MTBPS that permanent spending commitments, such as a basic income grant (BIG) should not be based on temporary revenue windfalls.
The group says the pandemic has caused a disproportionately high increase in spending and it needs to be cut. “Unless future real gross domestic product (GDP) growth picks up, our forecast does not point to a meaningful improvement in the budget over the medium- to long term.”
South Africa has run 52 consecutive quarterly budget deficits since 2008 causing government debt to more than double from 24% of GDP to almost 70% of GDP in 2021.
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The extension of the SRD grant for another year could either lead to increased borrowing or funding by the redirection of spending or higher taxes and the group points out that there is still the matter of the Constitutional Court’s ruling over the Labour Appeal Court’s decision that the 2018 public wage agreement was unlawful.
“If this gets overturned, the state may be required to implement the agreement retroactively, which will have a significant impact on fiscal finances and could potentially lead to a reduction in the size of the public service.”
Borrowing conditions have become less favourable over the past two years, while South Africa’s borrowing requirements have increased. The group also thinks that it is unlikely that South Africa will benefit from external factors as it did in 2021 and expects external debt levels to rise again as the current account surplus and foreign reserve levels start to decline.
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According to Oxford Economics Africa, government investment has fallen to levels last seen before the global financial crisis. Government investment is forecast to represent a mere 13.3% of total spending in 2022, compared to a peak of 29.7% in 2008. “Hopefully, the president’s red tape team will translate into a more conducive environment for growth and actually lead to meaningful policy reform,” it says.
The group also points out that post-pandemic economic recovery in South Africa has been sluggish compared to other countries, but conditions have started to normalise, which is a good thing, as disruptions brought about by the pandemic have been damaging to livelihoods and economic activity in general.
However, the medium-term outlook does not paint a rosy picture, which will make it even more difficult for the 2022 budget. “In the five years before the pandemic, South Africa’s economy expanded at an average pace of just 0.9% per year and with monetary policy normalisation already underway, we forecast real GDP growth to average 1.9% per year over the next five years.”
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Compared to an average growth rate of 1.9% per year for labour supply, it is clear that too few jobs will be created over the medium term, the group says and warns that unless meaningful policy changes are implemented, the unemployment rate will remain above pre-pandemic levels over the medium term.
“State capture has seen the economy’s bottom fall out, and widespread inefficiency at a government level means that increased private sector involvement has become an unavoidable prerequisite for growth.”
Godongwana has the near-impossible task of tabling a growth-friendly 2022 budget while sticking to the Treasury’s fiscal consolidation targets. The finance minister has to deliver and what South Africa needs is that government debt is reduced or that the economy expands at a faster pace.
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