The upcoming 2022 budget is the most important ever after President Cyril Ramaphosa’s State of the Nation Address (Sona), which featured both positive signs of a change in policy direction and timelines.
The focus is now shifting to Finance Minister 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 fiscal policy statement (MTBPS) for the state-owned enterprises (SOEs) and let go of the underperforming entities that are no longer considered strategically relevant?
Oxford Economics Africa research group says Godongwana will have little room for fiscal maneuvering in the 2022 budget, with more tax pressure on the tax authorities as South Africa consistently spent more than it received in tax revenue. Instead of translating into higher economic growth, this caused government debt to rise. This means cutting government spending as there is limited room to raise taxes to boost revenue growth.
The extension of the Emergency Social Assistance (SRD) grant to March 2023, announced at Ramaphosa’s Sona, was probably the best outcome given South Africa’s budgetary constraints as more consultation is needed before committing ourselves to such large expenditures. , the group says.
Excessive pressure on taxpayers
“In the context of weak economic growth and poor service provision, the relatively high corporate and income tax rates in South Africa are placing undue pressure on taxpayers. South Africa’s high unemployment and shrinking tax base are also an unfortunate combination given the economy’s weak growth prospects.”
While corporate taxes were boosted last year by a windfall in commodity prices, Godongwana already told 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 led to a disproportionate increase in spending and the need for spending cuts. “Unless future real gross domestic product (GDP) growth picks up, our forecast does not point to a meaningful fiscal improvement in the medium to long term.”
South Africa has had 52 consecutive quarterly budget deficits since 2008, pushing the national debt more than double from 24% of GDP to nearly 70% of GDP in 2021.
Subsidies and civil servant salaries in the 2022 budget
The extension of the SRD grant for another year could lead to more borrowing or financing through spending reorientation or higher taxes and the group points out that the Constitutional Court’s ruling on the decision of the Labor Court that the 2018 public wage agreement was illegal.
“If reversed, the state could be required to retroactively implement the agreement, which will have a significant impact on fiscal finances and potentially lead to a reduction in the size of the public service.”
Borrowing conditions have become less favorable in the past two years, while South Africa’s borrowing needs have increased. The group also thinks South Africa is unlikely to benefit from externalities like in 2021 and expects external debt levels to rise again as the current account surplus and foreign reserves begin to decline.
Public investment lagging behind
According to Oxford Economics Africa, public investment has fallen to pre-global financial crisis levels. Public investment is expected to represent only 13.3% of total spending by 2022, compared to a peak of 29.7% in 2008. “Hopefully the president’s bureaucracy team will translate into a more favorable environment for growth and actually lead to meaningful policy reforms,” it says.
The group also points out that South Africa’s post-pandemic economic recovery has been slow compared to other countries, but conditions are starting to normalize, which is a good thing as the disruptions caused by the pandemic are damaging for livelihoods and economic activity in general.
However, the medium-term outlook is not rosy, making the 2022 budget even more difficult. “In the five years before the pandemic, the South African economy grew at an average pace of just 0.9% per year and with monetary policy normalization already underway, we predict real GDP growth of on average 1.9% per year over the next five years.”
Too few jobs
Compared to an average growth rate of 1.9% per annum for labor supply, it is clear that too few jobs will be created in the medium term, the group says, warning that unless meaningful policy changes are implemented, unemployment will rise above pre -pandemic levels in the medium term.
“The coup has hit the bottom of the economy, and widespread inefficiency at government level means greater private sector involvement has become an unavoidable condition for growth.”
Godongwana has the near-impossible task of submitting a growth-friendly budget for 2022 while adhering to the Treasury’s fiscal consolidation targets. The finance minister has to perform and what South Africa needs is for the national debt to be reduced or for the economy to grow faster.