Budget preview: No time for despondency

The 2022/23 national budget speech takes place at a time when SA, and indeed the world, is emerging from a two-year battering by a pandemic that has left the country reeling.

The IMF now speaks of disrupted global growth as the main feature of the year ahead, and says SA’s economy is expected to grow by 1.9% in 2022, compared with its forecast last October of 2.2%.

The downward revision is due to the disruption of global supply chains caused by the Omicron variant of Covid-19, rising inflation (here and in advanced and developing economies) leading to higher interest rates, record debt levels in parts of the world, and heightened policy uncertainty.

But that shouldn’t lead us to inertia and policy paralysis. We have to face the year and decade ahead with determination, decisiveness and a sense of optimism. We cannot afford to be despondent. The budget thus needs to respond to several critical issues to foster this sense of confidence.

SA’s economic growth never truly recovered from the global financial crisis of 2008/09. Even as other middle-income emerging market economies restored their growth rates to pre-recession levels, SA went on to record the worst decade on record for growth, according to the SA Reserve Bank Quarterly Bulletin.

The government’s economic management performance for the decade ahead will be judged by how quickly we can get the growth rate back to pre-Covid levels, and then improve to pre-recession levels. This year’s budget needs to spell out the first steps to changing the growth trajectory.

Government’s economic reform programme is characterised by lengthy lead times between formulation and implementation. The latest setback is the court action by telecommunications companies over the auctioning of spectrum rights.

Government shouldn’t allow this to halt the overall momentum of reforms and it must also move in areas such as third-party access to rail, announced in the Economic Reconstruction & Recovery Plan in October 2020, to help lower the cost of logistics.

Critical infrastructure

Infrastructure spending is a critical pillar of economic recovery. Government needs to decide if it is worth borrowing to fund infrastructure spending to boost economic growth. This will be a high-risk move if the borrowed funds aren’t used as intended or the anticipated growth does not materialise.

One of the most critical questions to be answered in this budget is how the tax burden will be shared between individuals and corporates. Over the past year the idea of a universal basic income grant (BIG) has gained momentum, while National Health Insurance (NHI) remains an aspiration. Both of these items will require tax increases to be financed.

So, if government needs to raise taxes to fund a BIG or the NHI, will it hurt consumers through personal income tax or VAT increases? Or should the burden fall on corporates or high net-worth individuals? Raising taxes of any sort may have a negative effect on the economy.

The focus should rather be on widening the tax base while lowering tax rates, a process that is already under way with the reduction of the corporate income tax rate, accompanied by a reduction of some tax allowances such as deductions for certain expenditures and the utilisation of assessed losses. Imposing an even heavier burden on the existing tax base would damage the economy and therefore also tax collection in the long term.

One of the most visible signs of the economic devastation wrought by Covid-19 has been the closure of many small, medium and micro enterprises (SMMEs). Government needs to put in place tax incentives and other measures to help stimulate the revival and growth of SMMEs as a critical engine for growth and job creation.

It also needs to focus on rebuilding the SMME sector as an important backbone of the economy, which will lead to employment where people live. Focus must be given to areas such as secondary manufacturing, agro-processing and mineral beneficiation, technology and artisanship, with a feeder from further education & training colleges. The growth of SMMEs should be highlighted as having a primary role in the overall growth agenda for SA. 

SMMEs and SOEs

Last year in its Article IV report, the IMF said SA should take a full inventory of state-owned enterprises (SOEs) and divest or liquidate those that are no longer relevant. According to IMF staff, there has been little progress in the government's implementation of structural reforms at SOEs, leaving continued weaknesses.

“Structural rigidities are depressing private investment and hindering inclusive growth and job creation. These rigidities need to be tackled immediately to increase the economy’s productivity and competitiveness and reduce poverty and inequality,” it added.

However, there seems to be inertia in reviewing the SOE portfolio and deciding which ones to keep and which ones to merge, close down or privatise. The finance minister must look beyond financial support for the SOEs and include managerial and governance capacity as well as competencies to deliver on the mandates of these entities. 

Last year, at COP26, SA secured R130bn in soft loans to assist it in moving away from coal. But this is not the full amount required. In this year’s budget speech the finance minister should spell out how these funds are to be deployed and how government will raise the balance of the required funds to finance a just transition without stifling growth. The use of the carbon tax and other instruments to fund and promote a clean and green energy future will be critical.

Healthcare

The Covid-19 pandemic has shown the need for a robust public health system to cope with health crises. At the same time, the response has taken away spending from other critical parts of healthcare spending, including HIV and TB. Beyond 2022 other health challenges are expected to begin to emerge, not only directly from Covid-19 but also as an indirect result of the socio-economic fallout from the pandemic.

The budget still needs to allocate adequate resources to serve the immediate needs of South Africans beyond Covid. It is crucial that focus be expanded to other health-related burdens such as TB, non-communicable diseases such as diabetes, and socio-economic factors such as teenage pregnancy.

As the budget takes place against a backdrop of fragile and cautious global recovery, its main aim should be to give fresh impetus to the country’s economic recovery, as well as provide growth and development plans.

• Gwala is business tax leader for Africa tax & legal, Tabane industry leader for government & public service, and Theophanides healthcare & life sciences leader, all at Deloitte Africa.