Revenue windfall glimmer of hope for South Africans
The 2022 medium-term budget policy statement (MTBP), delivered by finance minister Enoch Godongwana recently, offers hope for South Africans.
Taxes are not expected to rise over the medium term. The social relief of distress grant was extended by another 12 months. More money was allocated to build, improve and replace infrastructure. There is more money to combat corruption and crime.
And the balance sheets of some state-owned companies will improve, allowing them to focus on building and maintaining roads, providing electricity, moving more people and goods by rail, and getting more goods through our ports. Government debt will likely not become unsustainable in the medium term. But, many substantial risks remain in these uncertain times.
Higher-than-expected corporate tax revenues has led to a substantial windfall: revenues are forecast to be R83.5bn higher than the 2022 budget speech forecast.
The government extended the social relief of distress grant until March 2024, which will bring relief for many, given that years of slow growth, together with the Covid-19 pandemic and cost-ofliving increases have exacerbated already unacceptable rates of unemployment and poverty.
A large part of the windfall will increase spending on infrastructure, and these investments have the potential to make inroads into service delivery backlogs.
The minister also announced that government will take on part of Eskom’s total outstanding debt of R400bn, adding up to R267bn, to ensure Eskom will be able to complete restructuring and secure and expand electricity supply.
The revenue windfall is unlikely to last, given that Treasury revised its growth forecast downwards, and commodity prices have probably peaked. One reason for revised forecasts is the effects of sustained loadshedding on economic activity with no end in sight.
Furthermore, public sector unions and government have still not reached an agreement about pay increases: government is offering a 3% increase, while unions are demanding between 6% and 10%. It is concerning that apparently little progress has been made in these wage negotiations.
Interest rates will probably increase further in the coming months. These increases will increase debt service costs, which may lead to further spending reprioritisations, or greater borrowing. Higher interest rates will also dampen private spending, putting further strain on Treasury’s projections of economic growth and therefore government revenue growth.
To date, government has been relatively silent on this issue, despite evidence from several economic studies that very low inflation rates only contribute marginally to economic growth in high-income countries, let alone middle-income countries like SA.
Finally, the improved fiscal outlook also depends crucially on improved financial performance of state-owned companies.
The government has made substantial progress towards restoring fiscal sustainability during trying economic times. Wisely, it has not used its temporary revenue windfall to permanently increase spending.