What to expect from the mid-term Budget this week
Finance minister Enoch Godongwana will present the Medium Term Budget Policy Statement (MTBPS) on Wednesday (26 October). Several bodies expect it to address critical factors surrounding fiscal and economic sustainability in South Africa.
The extreme global and domestic macroeconomic volatility in recent years has resulted in significant adjustments to the outlook for public finances from one fiscal statement to the next – and this week’s MTBPS is likely to follow this trend, said the Bureau for Economic Research (BER).
Surprisingly, South Africa has an expected revenue overrun due to higher-than-expected inflation, which boosted nominal GDP expectations.
According to Nedbank’s MTBPS preview report, tax revenue has been supported by high inflation, and the buoyant collections in the first five months of 2022/23 point to total revenue exceeding budget estimates for the fiscal year.
Total revenue rose by 10.3% year-on-year in the five months to August, with substantial gains in corporate taxes (15.3%), personal income taxes (8.4%), and value-added tax (VAT) (11.9%), said Nedbank.
The bank forecasts revenue to rise by 8% in 2022/23, above the National Treasury’s 2.9% forecast, translating into a revenue overrun of R130 billion.
However, PwC highlighted that while tax collections – the largest single contributor to fiscal revenues – have grown by more than expected in the 2022/2023 fiscal year, the fiscal outlook is still for large budget deficits over the medium term alongside a continued rise in public debt.
Nedbank expects expenditure to increase by an annual average of 6.4% (in nominal terms) between 2022/23 and 2024/25.
In light of the revenue overrun, many are now looking to the MTBPS to reveal how much of the extra revenue will be gobbled up by additional expenditure pressures. The key factors the MTBPS is expected to address are:
Higher public sector wages
Treasury is set to pencil in more for the already bloated public sector wage bill (PSWB) after the government upped its salary increase offer to 3%. The revised outlay on the consolidated wage bill could be upwards of R20 billion more for 2022/23 than envisaged in February, the BER noted.
PwC added that the MTBPS needs to firmly reiterate that the government is not walking back on its pledge to reduce the pressure exerted on the budget by remuneration costs, which will test the National Treasury’s resolve to reduce wage bill growth from an average of 7.3% per annum during 2014/2015 and 2019/2020 to just 2.1% per annum over the medium term.
Public sector unions have rejected the government’s 3% wage offer and are demanding 6.5%. The South African Reserve Bank has warned that wage hikes have the effect of pushing inflation higher, which may lead to further interest rate hikes.
Momentum Investments said the pace of government spending is likely to ramp up on the back of the final wage deal between the government and public sector unions.
According to Nedbank, after Eskom and Transnet labour unions secured increases of 7% and 6% for the current fiscal year, it is unlikely that government workers will accept increases lower than 6%.
The assumption of 6.5% in 2022/23 and an average of 5% per year in 2023/24 and 2024/25 would raise wage costs by 8% or R180.7 billion over the MTEF period, over the National Treasury’s February 2022 Budget, which was based on an annual average rise of 1.8% per year.
“Based on our revenue forecasts, the wage bill would absorb 37% of fiscal revenue per year over the MTEF period,” it said.
More bailouts for state companies
The budget may include more funds for non-Eskom state-owned enterprises (SOEs), including Transnet, says the BER.
Momentum Investments noted that although the government stood firm on the issue of additional bailouts for SOEs at the medium-term budget in October 2021, the adoption of a tough stance on SOEs will be tested in the medium term as a number of critical SOEs continue to struggle with operational and financial inefficiencies, corruption and mismanagement.
“Challenges faced by SOEs have resulted in poor service delivery, higher unemployment, low business confidence and weaker economic growth,” the group said.
Grants – including basic income grant
The BER said that another concern on the expenditure front is whether Treasury provides for an extension of the R350 per month social relief of distress (SRD) grant and, if so, whether there are implicit tax increases provided in the fiscal framework to finance this.
Others, like Citadel’s Chief Economist, Maarten Ackerman, are keeping an eye out for anything related to a basic income grant.
“In terms of South Africa’s macro-economic outlook, it’s essential to note that there was yet another revenue windfall in addition to the revenue overruns in recent years. So, we’ll need to see what the finance minister does with that,” Ackerman said.
“We’d like to see the windfalls being used productively – not just on once-off, temporary social spending that does little to nothing to drive economic growth.”
According to PwC, Treasury sees the possible funding options for a basic income grant to be undesirable – including raising personal income taxes, implementing a wealth tax, increasing the value-added tax (VAT) rate, taking on new debt, or reprioritising available funds.
However, Godongwana said on September 19 that the National Treasury is looking at income support as part of a framework for a comprehensive social security plan — where income support is just one of the components.
“The finance minister indicated that the MTBPS is likely to contain some comments in this regard. We believe it is critical that the framework for comprehensive social security must be detailed as soon as possible given the country’s socio-economic challenges and ongoing widespread debate about a BIG,” the group said.
An answer to e-tolls
Transport minister Fikile Mbalula has long promised an outcome to Gauteng’s failed e-tolling project. He has pinned the day for the final say on the system on budget day this week.
It is not yet clear what will be done with the system, but the minister has left no doubt that no matter how the system is changed – whether it is transformed or scrapped altogether – the debt on the system must be paid.
Treasury has, for the last few years, given road agency Sanral billions of rands in grants to cover the shortfall and debt accrued on the system, and it is expected that this will continue.
In the 2021/22 financial year, Sanral was given R3.85 billion in the form of a GFIP grant, up from the R2.72 billion grant in 2020/21. The failure of the system – which represents 1% of the roads on its portfolio – has resulted in a freeze on all future work.
Taking on Eskom’s debt
A further key focus in the MTBPS will be news on a ‘solution’ to Eskom’s unsustainable debt burden, said the BER.
Eskom’s debt stands at around R400 billion, and the BER expects Godongwana to transfer around R200 billion of the power utility’s debt to the sovereign balance sheet – given that Eskom has argued that its debt servicing is only sustainable at a level of R200 billion.
However, the BER said that the rise in overall government debt from an Eskom debt transfer could be relatively contained thanks to the revenue overrun in 2022/23.
PwC said that while the transfer of debt from Eskom to the sovereign would result in a further deterioration in fiscal metrics, it could well be the only choice available to shore up the power utility’s finances and the country’s economic prospects.
Both the BER and PwC said that the transfer should be welcomed as South Africans would probably prefer the debt transfer option over a 32.7% increase in electricity tariffs in 2023, as requested by Eskom from the National Energy Regulator of South Africa (NERSA).
The BER expects gross government debt for 2022/23 to rise to roughly 73.5% of GDP versus the 72.8% Treasury anticipated in February.
Reframing the budget after a chaotic 2022
The February 2022 national budget was tabled before Russia invaded Ukraine. As a result, growth forecasts were revised lower globally while inflation estimates soared on the back of an additional shock to commodity markets.
According to Nedbank’s report, the intense load-shedding, the lingering effects of the damage caused by the KwaZulu Natal floods, labour strikes, and the Russia-Ukraine war pose downside risks to Treasury’s February 2022 growth forecasts.
Real GDP is expected to grow by 1.8% in 2022 – slightly lower than the National Treasury’s 2.1% forecast in February. In 2023, the economy will likely have to grapple with the global slowdown and higher interest rates, said Nedbank.
Nedbank’s report anticipates growth to fall to 1.2% in 2023, compared with the National Treasury’s 1.6%. Therefore, National Treasury is expected to lower its real GDP growth forecasts and raise its inflation projections.
The bank further highlighted that improving the financial metrics is on the back of temporary factors and, therefore, the need to maintain fiscal discipline remains of paramount importance.
It added that expenditure restraint − maintaining low growth in non-interest recurrent expenditure − will have to be achieved through tight controls on the public sector wage bill and social transfers.
Nedbank said that the economic growth forecast faces significant downside risk, which could undermine revenue growth and worsen the fiscal metrics.
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