Here’s what to look out for in the upcoming budget

President Cyril Ramaphosa’s State of the Nation Address (Sona) coupled with last October’s Medium-Term Budget Policy Statement (MTBPS) gave us some foretaste of what to expect in Finance Minister Enoch Godongwana’s upcoming budget.

Investec treasury economist Tertia Jacobs believes the outcome of the main budget deficit for the current fiscal year could be better than National Treasury’s forecast of 4.9% of GDP. Lower spending, and corporate income tax receipts ahead of target, could lower the deficit to 4.5% of GDP.

Investec Corporate and Institutional Banking (ICIB) estimates nominal GDP growth in FY22/23 is likely to be ahead of National Treasury’s forecast of 5.8%, at 7.2%.

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The better-than-expected nominal growth for 2022/23 flows from restocking and a positive performance in the value of exports, as commodity prices and especially the coal price fared better.

The reopening of the economy supported the services sector and consumer spending had a strong start before higher inflation started to erode purchasing power.

The variance in growth forecasts is wide, with the South African Reserve Bank lowering its 2023 growth forecast to 0.3%. ICIB puts it at 0.7%, while the upper range of economists’ forecasts is 1.3%. National Treasury’s forecast of 1.4% is likely to be lowered as well.

“A key issue to watch in this budget is e-tolls and how Gauteng could finance its R13 billion portion to be paid to Sanral, in addition to annual maintenance of R2 billion to R3 billion. We need to see how it plans to pay for this,” says Jacobs.

The nature of a slowdown is important

Not all economic slowdowns are the same, adds Jacobs. The Covid slowdown in 2020 knocked tax revenues by R120 billion, followed by a sharp recovery in the following year.

“The current slowdown is caused by an intensification of load shedding to stages 4 to 6, which has a detrimental effect on many sectors.

“Sectors such as agriculture, manufacturing and trade are exposed to load shedding.

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Ramaphosa’s Sona speech also suggested help was on its way from Treasury to ease Eskom’s R400 billion debt pile, which will allow it to make the necessary investments in maintenance and transmission.

The new minister of electricity will become the central command post for the resolution of the load shedding crisis, though how this will work remains to be seen.

The rise of PPPs

Given Treasury’s spending restraints, public-private partnerships (PPPs) will, of necessity, become a feature of infrastructure investment and development going forward. Trade unions have traditionally been hostile to them, as they see these partnerships as privatisation in all but name. In 2021, government announced its intention to simplify and accelerate PPPs, but there is little evidence of much progress in this regard – perhaps because of hostility from the left.

Reforms

These are reforms which are relatively insignificant from a budgetary perspective but require resolute action by government. Despite promises of creating an enabling environment for business by cutting red tape in areas such as cross-border trade, property registrations and work permits for foreigners with the right skills, little appears to have been done.

The recently declared National State of Disaster to address the electricity supply problem faces huge backlash from opposition parties, businesses and civil society still smarting from the horrendous impact of lockdowns during Covid.

“We remain circumspect about the National State of Disaster and would like more information about how it will be rolled out, and how long it will be imposed on the country,” says Jacobs.

“What could be a major benefit to the country is the announcement of incentives for solar rooftop panels.”

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Social grants

In his Sona address, Ramaphosa said 25 million South Africans receive some form of income support from government, in addition to the two million households receiving free basic water, free basic electricity and free solid waste removal.

The cost of social grants will have to be adjusted for inflation, and there is little scope to bring this spending down in the absence of a major investment and employment drive.

Tax incentives for rooftop solar

“One of the big factors to watch in 2023/24 is rising input costs as companies spend more on diesel, generators and solar,” says Jacobs.

“We also want to keep an eye on the extent to which consumer spending will decline over the coming year. On the plus side, there have been no major retrenchments, salary increases are still inflation-related, and fixed investment will do better as companies and residences strive for energy self-sufficiency.

Debt sustainability

There is a possibility that Treasury will report a primary surplus – meaning non-interest expenditure is less than revenue. This is important for debt stabilisation. While Treasury aims to achieve a primary surplus in 2023/24, this may be beyond its reach in view of spending pressures and lower revenue receipts.

Brought to you by Investec.

This article originally appeared on Moneyweb and was republished with permission.
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