We’re not out of the woods but this Budget moves us in the right direction
POSTED ON: February 23, 2022 IN by Admin
Finance minister Enoch Godongwana produced a good maiden budget that managed to expand expenditure in some areas while ensuring that government remains on track to consolidate its debt outlook.
“The Budget was also growth positive in that taxes were largely unchanged and National Treasury recommitted to the structural reforms called for to deliver faster economic growth,” says BLSA CEO Busi Mavuso.
Treasury delivered on its commitment to reduce corporate income tax rate by 1%, having removed several other tax incentives recently. While fiscally neutral, it does simplify the tax system which is positive for the business environment.
Also positive for the growth outlook was news that implementation of critical structural reforms contained in the Economic Reconstruction and Recovery Programme, particularly in electricity, rail, ports and telecommunications, are being accelerated. As Minister Godongwana said in his speech, infrastructure investment is the backbone of a thriving economy.
BLSA was also encouraged that the National Treasury will be implementing the results of a recently completed review of the public-private partnerships framework and that a centre of excellence for PPPs and other blended finance projects will be created. BLSA has highlighted that the complexities of PPP regulation are a significant constraint to delivering greater private sector investment into public sector infrastructure and we hope the reform process resolves these constraints speedily.
We are also encouraged by the bounce-back loan scheme that was announced. This has the potential to help sectors of the economy that have been seriously hurt by the pandemic, particularly hospitality and tourism. For it to succeed, businesses should be given maximum flexibility in how they use the funds and the repayment obligations. Many of the businesses that have been damaged are substantial employers but have not been able to access finance to invest in reopening. We hope the scheme is of value particularly for these companies.
Treasury’s revision of its economic growth estimate for 2021 to 4.8% from 5.1% at the time of the medium-term budget policy statement (MTBPS) makes sense given SA’s challenges and the difficulties faced by the global economic environment.
“The downward revision of 2021 growth was inevitable, but this really highlights how important it is that we implement growth-enhancing reforms as soon as possible,” says Mavuso. “Treasury cannot do this alone – we need to see evidence of the whole cabinet acting together to drive through reforms that reduce the cost of business and ensure businesses can invest and grow the economy.”
The debt burden remains concerning. This year, government debt has reached R4.3-trillion and is projected to rise to R5.4-trillion over the medium term. This means debt-service costs will average R330bn annually over the medium-term expenditure framework, a huge drain on available expenditure that could instead be funding investment and social services. This is a legacy of the excessive and unproductive debt built up over the decade after 2008. The lesson we cannot forget is that debt should be incurred only when it finances investment that will drive economic growth instead of consumption.
Treasury is making progress in undoing this legacy, with the consolidated budget deficit projected to narrow from 5.7% of GDP in 2021/22, to 4.2% of GDP by 2024/25. Treasury now expects to realise a primary fiscal surplus by 2023/24. The debt ratio will stabilise at 75.1% of GDP by 2024/25, three percentage points lower than projected when the MTBPS was tabled. This is significant progress in regaining investor trust – that government has regained control of its finances. It is important that we continue this path to eventually regaining investment grade credit ratings, enabling us to reduce the cost of debt.
We are also encouraged by the resourcing of the justice system, including strengthened courts. The Department of Justice and Constitutional Development’s allocation was increased by R1.1bn while the Office of the Chief Justice will receive an additional R39.9m. The key question is whether this will be sufficient – in our view there will need to be additional resources, some of which might be available from business and other social partners.
BLSA agrees with the Minister that corruption is a major blight on our country that has hampered our economic growth potential and increased our fiscal vulnerability. We agree wholeheartedly with his assertion that accounting officers need to ensure that their procurement processes have integrity, provide value for money and are free from interference from politically connected persons and bidders.
Regarding social grants, we support the Minister’s view that government is unable to introduce a permanent social grant unless tax revenue significantly increases. This is the correct approach: long-run social grant commitments can only be funded out of permanently higher government revenue. Such revenue accrues from economic growth. The Minister is putting the cart and horse in the right order: growth has to lead to increased social spending. Social spending that is not funded out of growing revenue results in a deteriorating fiscal position and loss of investor confidence, ultimately leading to worse growth, triggering a vicious cycle.
We agree with the Minister that now is not the time to increase taxes and BLSA welcomes the news that individual tax rates will not be increased and for the first time since 1990 there will be no increases in the general fuel levy or the Road Accident Fund levy.
The employment tax incentive will be expanded through a 50% increase in the maximum monthly value to R1,500. “The employment tax incentive is a positive way to use state resources to deliver greater employment,” says Mavuso. “I want to ensure that businesses take advantage of the opportunity to get more young unskilled workers into jobs.”
However, the Budget also had to contend with seriously negative aspects of public sector performance. Most obvious is the R308bn that has been directed towards bailing out failing state-owned companies. This is an enormous financial drain on the state for institutions that should be able to run efficiently and fund themselves. It is critically important that the review of the future of our SOEs by the Presidential State-Owned Enterprises Council results in long-term solutions. The future of SOEs must be informed by the value they create and whether they can be run as sustainable entities without bailouts from the fiscus.
While government continues to support Eskom to remain financially sustainable during its transition, the power utility is faced with a large amount of debt that remains a challenge. It was encouraging that the Minister highlighted work that Treasury is doing to develop a sustainable solution that is fair to all stakeholders. The restructuring and unbundling of Eskom’s main units is key to long-term energy system stability and value for money.
Treasury is extending the first phase of the carbon tax to 31 December 2025. This means that the large emitters of our greenhouse gas emissions have been given another three years to bring in new technology to reduce these emissions. This is obviously a challenge to our goal of reaching zero carbon emissions by 2050 and it is important that this extension be temporary.
BLSA believes that the state of our municipalities urgently requires support and welcomes the addition of R28.9bn to the local government equitable share. As the Minister emphasised, these funds must be used for the purpose they are meant for. “At present 175 out of 257 municipalities are in financial distress,” says Mavuso. “That is a massive negative for businesses who often find themselves left without basic services or having to waste resources on creating parallel infrastructure. It is clearly in all our best interest to get local government working efficiently and effectively”.
The minister’s assurance that the historically rapid increases in the public sector wage bill will be curtailed is to be applauded. Compensation spending will now increase marginally, from R665.1bn in 2021/22 to R702bn in 2024/25, at an average annual rate of 1.8%. A Public Sector Labour Summit is scheduled to take place from 28 to 31 March, which will be an excellent opportunity for all stakeholders to initiate the development of sustainable public service and remuneration guidelines.
“While the country is far from being out of the woods, our finances have improved from the worst,” says Mavuso. “There is still much work to be done to restore our fiscal position to enable the kind of investment and social spending that would provide a better life for all South Africans. BLSA looks forward to working with government and our other social partners to deliver that.
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