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Finance minister Enoch Godongwana. Picture: BLOOMBERG
Finance minister Enoch Godongwana. Picture: BLOOMBERG

Finance minister Enoch Godongwana has a tough job ahead of him in delivering the 2023 budget speech. As I write, Eskom — the nation’s heavily indebted and largely dysfunctional electricity parastatal — has moved to stage 6 load-shedding, with stage 8 again on the cards.

There is literally no light at the end of the tunnel until the end of 2024. Estimates suggest that the crisis is costing the economy roughly R1bn a day in lost productivity. That is only the direct cost; the indirect costs are yet to be counted, but they are likely to be significant:

First, investment will be foregone — few investors have the risk appetite to invest in a country whose energy availability factor (EAF) is declining and has a transmission grid that is not configured to ingest renewable power from the areas in which it could be more efficiently produced. A case in point is that the Economist Intelligence Unit (EIU) forecasts net foreign direct investment (FDI) into SA for 2023 to be a trifling $4.9bn, and our total share of global inward direct investment flows to be 0.44%.

The mining industry plugged the hole in the fiscus last year, and cannot be expected to do so again given lower global commodity prices and a 9% year-on-year production decline. There is hardly any exploration investment flowing in to establish new supply pipelines either, partly because SA remains an exceedingly difficult policy environment for responsible miners. 

Second, water-shedding, as a direct effect of load-shedding, means not only that citizens go without potable water, but that sanitation quality declines because sewage cannot be pumped. The social costs of the resultant negative health impacts are already being felt, but are not yet tallied in the national accounts.

Toxic debt

The challenge for Godongwana, beyond the negative economic growth implications of declining EAF, is that a large portion of Eskom’s R422bn debt is toxic. It is widely expected that Godongwana will announce that some of that debt is to be transferred onto the state’s balance sheet. As it stands, the Treasury expects debt service costs as a proportion of GDP to come in at 4.7%, at 14% of expenditure and 17% of revenue for 2022/23. The figures are expected to climb to 5% of GDP, 15.9% of expenditure and 18.4% of revenue by 2024/25.

The total debt-to-GDP ratio will climb from 72% in 2022/23 to 75.1% in 2024/25. The Treasury’s growth forecast, from which much of its expected revenue will flow, is at 1.6% for 2023. The EIU forecasts the figure at 1.3%, but the Reserve Bank in January revised its growth forecast downwards to only 0.3%: “Given the scale of load-shedding, the Bank estimates that it deducts as much as two percentage points from growth in 2023.”

Debt servicing is Godongwana’s biggest overall challenge, and the prospect of loading Eskom debt onto the state balance sheet is a heavy millstone around the country’s neck. Credit ratings agencies are not likely to view this positively, especially if real GDP growth declines. Moreover, debt servicing costs are escalating, because our debts are predominantly denominated in hard currency, and the rand is likely to sink to R19.61 to the dollar by 2027 if the EIU forecasts are correct. A grace in this is that inflation will decline from a predicted 5.1% for 2023 to just 4.2% by 2027. However, unemployment is expected to grow from its current 35% to 36.3% over the same period. Unless SA can kick-start labour-absorptive economic growth, the fiscal outlook will remain poor.

Debt servicing will consume an increasing portion of the overall revenue pie. This comes at the expense of investing in growth-enabling infrastructure, justice and education. This points to a second major problem though, which is the quality of expenditure by the state. Total expenditure for 2022/23 is expected to come in at R2.15-trillion, with revenue at R1.77-trillion. The figures are R2.176-trillion and R1.853-trillion for 2023/24. That’s a deficit of 4.8% of GDP, which will appease the credit ratings agencies to some degree, as it indicates a semblance of fiscal discipline. But the discipline is only made credible in the impact of expenditure rather than keeping the deficit below a certain number.

Dismal results

The expenditure should accomplish something productive. For 2023/24, “learning and culture” is expected to consume 20.49% of the budget, the single largest expense item (second to debt servicing, which is expected to decline slightly to 15.39% from 15.9% in the 2022/23 year.) Health, which is falling apart, will consume 11.38% of the 2023/24 budget, like “community development” at 11.66%. Economic development comes in at 10.92%, with peace and security just below that at 9.97%. All good on paper.

Education expenditure, theoretically worth it because it builds the human capital required for economic growth, is producing dismal results. In 2016, SA scored last on the Progress in International Reading Literacy Study (Pirls) scale of the participating countries. The centre-point average was 500; SA scored 320, with 92% of SA students ranked “low or below” the global average.

Debt servicing is Godongwana’s biggest overall challenge, and the prospect of loading Eskom debt onto the state balance sheet is a heavy millstone around the country’s neck.

Moreover, for all the expenditure on “economic development”, the productive sectors of the economy are not growing. Infrastructure — ports, roads and rails as just three critical elements of this — expenditure is not alleviating bottlenecks and allowing the free flow of goods. The composition of budget revenue in this respect is instructive. For 2023/24, personal income tax is expected to come in at R575.6bn (a formidable 37.8% of the total), VAT at R433.4bn and corporate income tax at a tiny R251.6bn.

What that essentially tells us is that there are too few businesses, and the middle class employees of those businesses are being heavily squeezed for tax. Consider that the compensation of public sector employees (the civil service wage bill) will consume 36.8% of the 2023/24 budget or R618.4bn. Welfare consumes another 15.4% of the total annual budget, depending on how one counts it. Either way, SA spent an average of more than 3% of its GDP on social assistance between 2009 and 2016, and President Cyril Ramaphosa indicated in his state of the nation address (Sona) last week that nearly 25-million people are dependent on state grants in one form or another.

The upshot is that there is simply not enough personal income tax revenue to sustain the country’s fiscal needs. This is further evidenced by the fact that the SA Revenue Service (Sars) only processed 4.3-million non-provisional tax returns in 2022. An EY report indicated that in 2020, about 20% of individual taxpayers contributed 75% of the total personal income tax revenue, and all taxpayers combined constitute roughly 9% of the total population of the country. Keynesian economists continue to insist that SA must just spend its way out of trouble; that would be highly irresponsible with a government that has shown itself incapable of using the available revenue to build the kind of human and physical capital that the country requires to grow.

No matter what Godongwana says on Wednesday, the foundations of SA’s fiscal situation are shaky. Sars has performed admirably, and clearly there is competence at the Treasury, despite extensive attacks on these institutions during the Zuma years. But having tax revenue and spending it productively are two entirely different things.

• Harvey is director of research & programmes at Good Governance Africa.

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