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Optimistic Budget Masks a Number of Key Risks

Finance Minister Tito Mboweni’s budget has been received very positively, as demonstrated by the reaction from markets. SA Inc companies have rallied, the rand initially strengthened, and even the bond market is acting positively. However, while there are notes of hope, this budget also demonstrates a number of key risks, overly optimistic assumptions and potential weaknesses, pointing to an extremely challenging path ahead for the country.

First, GDP figures have come in slightly better than hoped for in October last year, showing a contraction of 7.2% for 2020/21 rather than the over8% contraction expected in October. National Treasury has also conservatively forecast 3.3% growth for the year ahead, before moderating to 2.2% for 2022 and 1.6% for 2023.

While we did expect a better number than usual for this year, coming off the exceptionally low base of -7.2% in 2020, it was really hoped that with the right reforms, we could pave the way for stronger growth in the longer term. It is clear, however, that after a rebound in 2021, we are expected to drift back below 2% in 2023.

This is enormously frustrating, as with the correct reforms we should really be able to kickstart the local economy. The muted 1.6% figure for 2023 is a number that we had become used to over the last five or so years, but given that it is in line with population growth, it will do nothing to fix our unemployment issues or the other socio-economic problems that the country is facing.

Better than expected revenue, but debt figures remain a point of concern

In another positive, the over-recovery of almost R100 billion is extremely promising, with markets communicating a great deal of relief. This means that the R40 billion in initial taxes that government mentioned it would need to raise in the October Medium Term Budget Policy Statement (MTBPS) has been scrapped. Better-than-expected revenue also means that the budget deficit has also come in at 14% of GDP for 2020/21 instead of 16%. This is then expected to decline to 9.3% in the next year, and to 6.3% by 2023/24. However, these numbers are compared to last October. If we compare them to last February, the tax shortfall is north of R200 billion which is the largest tax shortfall on record. This places some of the positives into perspective and highlights that the road ahead remains very steep.

It is further crucial to recognise that the projected budget deficit figures have been reached by pencilling in flat expenditure numbers for the next four years, using highly optimistic assumptions regarding cutbacks and reprioritisations in government spending. As many of these cutbacks seem to rely on the ability to freeze government wages in order to reduce the pressure of the public sector wage bill, there is still a significant risk to achieving the projected figures.

Also, somewhat optimistically, debt-to-GDP is now projected to peak at 88.9% in 2025/26, rather than around 95%. Although Mboweni made the point that National Treasury will tap into its cash reserves to fund the budget shortfall, given that the economic recovery will be staged from a very low base, and that government has scrapped some of its taxes and offered some additional tax relief, this may prove difficult to achieve.

It was then heartening to see that aside from the R7 billion set aside for the Land Bank, no further allocations were made to bail out State-Owned Enterprises (SOEs), which has been a bone of contention in the country for a number of years. However, it was also disappointing to note the complete lack of mention of Eskom, or how government will be handling and restructuring its debt. 

In a final note on South Africa’s concerning debt levels, debt-service costs are conservatively expected to approach 21% of tax revenue. This means that South Africa is far from out of the woods in terms of risking a debt spiral, with one of the highest debt-service levels in the world. And these high debt levels and interest repayments leave only 80% of revenue for key and productive government spending. 

Good news for South Africans

In an important step for the country in terms of the ease of doing business in South Africa, and in terms of the country’s ability to attract foreign investments, Mboweni announced that corporate tax would be lowered to 27% from the beginning of April 2022.

In even more good news for South African households, National Treasury has also increased personal income tax brackets by more than inflation, effectively making close to R2.2 billion in relief available to households.

Then, it was extremely positive to hear of the almost R800 billion infrastructure investment drive. This is not only significant in terms of productive government spending, but also demonstrates greater government willingness to partner with the private sector in successfully running and delivering on these types of projects. Just a few years ago, the words “private sector” and “private participation” would never have been mentioned in the Budget Speech, and this represents a step forward for the country in terms of promoting mutually beneficial public-private sector relationships and co-operation.

Overall then, while the February Budget demonstrates a number of improvements over the gloomy tone of the October MTBPS, a number of challenges remain, pointing to a tricky road ahead. All eyes will remain on government to rise to its goals, and if the necessary reforms are implemented with urgency, we may yet see the country finally change direction in terms of poverty, unemployment and inequality.

Maarten Ackerman, Chief Economist and Advisory, Citadel