REEZWANA SUMAD: Awash in tax cash, but for how long?

Finance minister Enoch Godongwana presents the medium-term budget policy statement (MTBPS) next Wednesday against the backdrop of global economic conditions probably deteriorating in 2023, which will limit the upside for revenue collection. SA’s real GDP growth projections for 2022 already have been revised downwards, mainly due to the effect of load-shedding.

Still, when compared with the 2022 Budget Review it’s evident that the MTBPS will need to revise nominal GDP estimates upwards, along with revenue estimates. However, a larger wage bill, a permanent basic income grant and further bailouts for state-owned enterprises (SOEs) will put more pressure on spending, offsetting much of the revenue boost.

In 2022/2023 SA’s fiscus will inevitably show a marked improvement relative to the February 2022 budget estimates because of low nominal GDP growth estimates by the National Treasury at the start of the year. SA’s nominal GDP growth rate at June 2022 was tracking at 5.1% year on year, well above National Treasury’s 3% forecast for 2022/2023. Our estimate of nominal GDP growth for 2022/2023 is around 8.7%, which implies a large revenue overshoot can be expected since revenue growth is a function of nominal GDP growth.

The current fiscal year began on a positive footing, driven by higher commodity prices (boosting corporate income tax collection) and duties (customs and excise) collection. For the fiscal year to date, gross tax revenue growth is 10.5% year on year, compared with the 2.2% full-year growth projection by National Treasury. However, we believe this robust pace will slow by the year-end and into early 2023 for a number of reasons.

The Government’s revenue collection over the past two years was predominantly lifted by mining and manufacturing company taxes, which were supported by higher export values and company profits. As global commodity prices (excluding oil and energy) began to decline after April, so too have SA’s terms of trade. The SA Minerals Council recently indicated that taxes and royalties from mining were down 20% in the first half of 2022, driven by lower export volumes. Nonetheless, even after accounting for this slowdown our estimates still point to a revenue overshoot as a result of conservative growth estimates in the February Budget Review.

We therefore estimate an R82bn tax revenue overshoot (relative to February Budget Review estimates) for 2022/2023. For 2023/2024 and 2024/2025 revenue is expected to be revised up by R103bn and R95bn, respectively, due to a higher base.

Government spending and wages

The pace of spending is also far more muted relative to the National Treasury’s February projections — departmental spending is down 0.8% year on year so far in the current financial year, compared with a projected 4.7% year-on-year growth. However, the government is approaching big spending months — December and March — while material spending commitments in the form of the wage bill and SOE support remain unresolved.

Public-sector wage negotiations commenced in May for the current fiscal year. The initial demand from unions was for a 10% increase, later reduced to 6.5%. The government’s latest offer is a 3% increase and a continuation of the R1,000 monthly after-tax cash payment, which commenced in April 2021, until March 2023. Last year, the one-year pay deal raised the government’s total compensation expenditure by R15bn in 2021/2022, R26bn in 2022/2023 and R16bn in 2023/2024.

Like ultra-conservative GDP growth estimates, the wage bill growth estimate is too low and there is a risk that expenditure will, in fact, rise sharply. The budgeted growth rate for 2022/2023 compensation is 2.6%, and the annual average budgeted growth rate of the wage bill in February was 1.8% per annum over the next three years.

A 6.5% pay deal would require a further R28bn being to be added to the wage bill for 2022/2023. Furthermore, that higher baseline will raise the 2023/2024 and 2024/2025 wage bills by R81bn and R103bn, respectively.

The R350 Social Relief of Distress (SRD) grant was extended to March 2023 at a cost of R44bn to the fiscus. Should this grant become permanent, it would cost at least R48bn a year, over and above the R250bn currently spent on social grants (excluding the SRD) in 2022/2023. The current medium-term expenditure framework (MTEF) doesn’t budget for a new permanent grant.

Without reducing spending elsewhere, total spending could exceed the February 2022 budget by R360bn over the next three years, far exceeding the revenue overshoot over the MTEF and result in wider budget deficits and higher debt levels.

Fiscal deterioration despite short-term gains

Based on the above estimates, our main budget deficit forecast is 5.2% of GDP in 2022/2023, falling to 5.1% of GDP over the next two years (compared with 6%, 4.9% and 4.5%, respectively, in the February budget). Despite potentially large expenditure over-runs over the medium term, nominal GDP is significantly understated in the budget and would be revised up, masking the deterioration in the budget deficit as a percentage of GDP.

While the performance of tax revenue outcomes is highly dependent on nominal GDP growth, SA being a small, open, commodity-exporting economy it is dependent on global growth and the global commodities cycle to propel GDP growth.

During commodity price booms there is typically strong pressure to scale up spending independent of the capacity to manage it. Government spending tends to be asymmetric in nature: during periods of large revenue undershoots spending is not revised down in tandem.

SA’s cumulative revenue undershoot from 1997 to 2021 amounted to R141bn. The cumulative expenditure overshoot over the same period amounted to R121bn. This resulted in the debt-to-GDP ratio rising from 27% in 2008/2009 to 70% in 2021/2022.

The IMF and the World Bank have warned of a sharp global economic slowdown, likely in 2023. That would be a strong headwind for SA’s revenue collection, despite the sizeable upward revisions in nominal GDP that we envision. That, combined with SA’s pre-election spending commitments and typical spending patterns after a commodity price boom, pose downside risks to the overall fiscal framework.

We do expect the MTBPS to address a few pressing issues; for instance, the finance minister is likely to provide further details on plans for Eskom’s debt, whether a permanent basic income grant will be included in its medium-term spending commitments, and how it plans to manage a potential wage bill overshoot in the midst of temporary revenue overruns.

• Sumad is senior research analyst at Nedbank Corporate & Investment Banking.