(By Dr Azar Jammine Director and Chief Economist Econometrix Pty Ltd)
The 2022 Budget did not contain many surprises. As expected, the key focal point was the likely substantial overrun of government revenue in the face of a huge windfall in profits of mining and related companies linked to the surge in commodity prices through the second half of 2020 in the first half of 2021. The world economy had recovered much more strongly and earlier than expected from the COVID-19 crisis. Development of vaccines within nine months of the outbreak of the virus and their successful rollout in advanced economies, together with the effects of unprecedented massive fiscal and monetary stimulus, contributed towards a boom in the global economy that caused the prices not only of oil, but of key minerals that South Africa produces, especially platinum group metals, iron ore and coal to surge. Profits of companies involved in the mining sector and related industries surged to such an extent that tax payable by such companies rose by R107bn, or 57.5% year-on-year. In the event, government revenue for the 2021/22 fiscal year did indeed come in R182bn above what had been budgeted for in the February 2021 Budget. Revenue from personal tax also rose by over R37bn, or 15% above what was budgeted. This is largely attributable to improved ability on the part of SARS to collect tax from individuals following a restructuring of the organisation to make it more effective after the institution had suffered massive emaciation under previous leadership put there to effect state capture for a handful of connected individuals.
Be that as it may, it was encouraging that the Minister of Finance Enoch Godongwana made it quite clear that in its budgeting process the government was not going to succumb to populist pressure to use the extra revenue collected for large-scale spending on various social and welfare projects. Other than the commitment to extend for an additional year the special social grant of R350 per month to 10.5m unemployed individuals who cannot access other social grants, amounting to an estimated R44bn of additional expenditure, there was no obvious area of large-scale spending to use up the revenue bonanza. Instead, the Minister committed to using much of the gains of the revenue overrun to pay off public debt. The potential debt servicing savings could amount to as much as R12bn per annum as a consequence. Allied to this was an implicit reluctance to countenance the introduction of a Basic Income Grant for all adult South Africans which could have crippled the fiscus, costing it double to treble the R248bn already earmarked to be spent on dishing out existing social grants in the coming fiscal year. Of course, central to the exercise of trying to limit the growth in government spending was a commitment to limit the average rate of increases in public sector remuneration for the next three years to just 1.8% per annum, which is less than the inflation rate. Naturally one of the challenges emerging from this budget, therefore, will be the extent to which the government will be able to sell such perceptions of austerity to workers in the public sector without the issue degenerating into large-scale industrial action through the course of the year. To the extent that the government’s limitation on increases in expenditure succeeds, this is geared to result in lower budget deficits and a lower trajectory for the public debt to GDP ratio than previously anticipated. In turn, this should ensure that the main credit ratings agencies do not downgrade the country’s credit rating any deeper into junk status. This ought to help encourage international investors to purchase South African government bonds which yield an attractive interest rate. In so doing, the interest rate on government debt may come down in such a way as to reduce the amount that government has to spend servicing its debt, currently at around 15% of overall government spending. As a result, more funds will then be available for vital social development.
Also welcomed by the business community was the decision not to increase tax rates further and in fact to reduce the company tax rate from 28% to 27% and to forego raising the fuel levy and Road Accident Levy for the first time in 30 years. Although the impact of these tax concessions is not huge, it did nonetheless send an important message that the government was indeed determined to embrace the private business sector and the consumer public at large as partners in forging an improved fiscal path and through this an enhanced path for economic growth more generally. In general, the 2022 Budget reinforced the belief that two important national institutions, viz. National Treasury and SARS, had regained some of the cohesion destroyed in recent years through state capture.
Despite this, there remained a sense of scepticism as to whether, in the face of continued factionalism within the ruling party, the structural reforms committed to in the Budget, as was the case with the preceding State of the Nation Address a fortnight earlier, would come to be implemented in such a manner that would countenance a turnaround in South Africa’s long-term declining economic growth performance. Past experience suggests that factional battles within the ruling party, construction mafia and cadre deployment within the public sector, has stood in the way of successful implementation of several infrastructural investment projects. On the positive side, there are a few upside risks. These include a possible realignment of political parties in favour of those identifying the private sector as the driver of economic growth and job creation. It is also conceivable that the multitude of infrastructural investment projects already agreed upon and outlined by the government, might begin to see the light of day. Finally, especially following the potential disruption to supplies of key minerals produced by Russia in competition with South Africa, that the rise in commodity prices of the past 18 months might be sustained for longer than previously anticipated, with positive implications for South Africa’s revenue collection and the health of its fiscal position.
As much as the 2022 Budget may have received approval from pundits, its impact on domestic financial markets and the Rand was limited, being completely overshadowed by international geopolitical developments surrounding the invasion of the Ukraine by Russia on the day after the Budget was tabled.