Godongwana needs sturdy boots to navigate the quagmire

There is no denying that finance minister Enoch Godongwana faces a fiscal quagmire when he tables the 2023 national budget on Wednesday. The government’s fiscal consolidation path is at serious risk given the challenging global macro environment and unfavourable domestic pressures. Those risks are driven by elevated inflation, high interest rates, weakening demand, floods and intensified power outages, resulting in increased spending requirements.

Over the past few years the SA Revenue Service has made great institutional strides in restoring tax collection through enhanced enforcement efforts that have resulted in a large compliance dividend. National Treasury will welcome the robust revenue performance as it bodes well for countering the rising spending requirements.

The improvement in revenue reflects better-than-expected personal and corporate income tax collections, which are are likely to exceed the 7.5% increase year on year as forecast in medium-term budget policy statement MTBPS). During the first nine months of the 2022/2023 financial year total personal income tax rose by 8.7% year on year, while corporate income tax was up 7.7% supported by favourable commodity prices and easing supply bottlenecks. VAT increased by 8.3% despite a low growth environment.

Beyond 2022/2023 we expect downside pressure on revenue collection on the back of lacklustre growth prospects and limited room to raise taxes despite the growing spending pressures. Given the well-contained total government spending in the first nine months of 2022/2023, we expect the growth in expenditure to come in higher than the medium-term budget’s 2022 forecast for the fiscal year.

Other spending allocations will include transfers to key state-owned enterprises (SOEs), relief funds for national disasters, and higher social transfers from April 2024 with the extension of the Social Relief of Distress grant. In addition, the state of the nation address emphasised the government’s commitment to cushioning households and businesses from the costs of mitigating the daily power cuts.

After President Cyril Ramaphosa’s declaration that the energy crisis is a national state of disaster we expect the National Treasury to detail the amount of Eskom’s debt that the state will assume, other ailing SOEs requiring government support. With regard to Eskom’s R400bn debt, we expect further details to be provided after government’s announcement that it would take up about a third of that.

We anticipate that the government will guarantee R200bn-R250bn of Eskom’s debt, which will increase the main budget deficit to 5.2% of GDP compared with the medium-term budget’s 2022 forecast of 4.9% of GDP. Meanwhile, gross debt to GDP will increase to 75.3% from 71.4% of GDP estimated in the MTBPS.

We believe there are increasing risks stemming from the wage bill expectations tabled in  the medium-term budget. The Treasury pencilled public sector wage increments of 1%, implying a 0% cost-of-living adjustment. In the previous fiscal year the government implemented a 3% pay increase in addition to the pay progression increase of 1.5%. Historically, the cost-of-living adjustments have risen above inflation and we believe this adjustment may be unrealistic, raising the likelihood of a higher wage settlement as unions are likely to negotiate for more than the budgeted wage increase.

The potential greylisting of the country by the Financial Action Task Force (FATF) remains a serious risk. Still, the government has made significant progress in addressing many of the identified shortcomings ahead of the FATF’s imminent decision. We note that the initial impact of such an outcome is usually short-lived for countries that apply the FATF’s recommendations.

There is significant downside pressure on revenue over the medium term expenditure framework, given the depressed global growth environment. With low contingency reserves, the government will need to reprioritise available funds for critical spending. With the wealth tax explicitly ruled out, we expect stronger revenue growth to be driven by efforts to strengthen compliance, in addition to increases in sin taxes, while private sector investment will be encouraged by expediting growth reforms.

• The authors are economists with Alexforbes.