Finance minister Enoch Godongwana stuck to his predecessor’s pledge to cut corporate tax and provide relief to workers while resisting pressure to use an almost R200bn revenue windfall to commit to a permanent increase in welfare spending.
The government pledged to maintain fiscal discipline that will see it record a primary surplus, meaning that revenue will be higher than spending excluding interest payments, a year earlier than planned. Officials said 45% of the extra revenue would be used to pay down debt, with the rest used to pay for the Covid-19 grant extension, allocations to provinces, financial support for students and extra health spending.
In his maiden budget delivered on Wednesday, Godongwana, who replaced Tito Mboweni during a cabinet reshuffle in August 2021, made no further commitment to increase welfare spending other than to confirm a one-year extension of the special Covid-19 relief grant for the unemployed, which will cost the fiscus R44bn and was flagged in President Cyril Ramaphosa’s state of the nation address earlier in February.
“In a context of overstretched public finances and persistently high unemployment, the continuation of such a social transfer must be matched by a combination of permanent spending reductions and tax revenue increases,” Treasury said in the Budget Review, in which it highlighted that debt-service costs accounted for 15% of total spending and were growing faster than all other items, including education and health.
Individual taxpayers got an unexpected R13.5bn break through an adjustment of personal tax brackets in line with inflation while a freeze on the fuel tax levy — the first since 1990 — delivered another R3.5bn.
The revenue sacrifice was done to protect the economic recovery and to shield consumers after an increase in international oil prices and currency volatility pushed the cost of petrol towards R20/l. The corporate tax cut will see the government forsake revenue of R2.6bn, though that was clawed back through other measures by limiting deductions.
It was made possible by an almost R200bn overshoot in revenue relative to forecasts in the 2021 budget. Most of that came from a R182bn outperformance in the tax take, while mining and petroleum royalties contributed R12bn.
The revenue bounce has helped us to meet spending pressures without increasing taxes
— Enoch Godongwana
The outcome exceeded by R67bn forecasts made in the medium-term budget policy statement, which was published just three months ago, according to the review.
“The revenue bounce has helped us” to meet spending pressures without increasing taxes, Godongwana said in a press briefing before delivering the budget speech.
“We are supporting the recovery plan.”
The revenue overruns enabled Godongwana to report a much-improved fiscal outlook, with the government projecting a budget deficit that will be 5.7% in the current year, compared with an estimate of 7.8% from November, and narrow further in the medium term to 4.2% by the 2024/2025 fiscal year.
It also sees debt as a percentage of GDP stabilising at lower levels, though this is still high relative to what the International Monetary Fund (IMF) and private-sector economists regard as sustainable for developing countries.
The debt-to-GDP ratio is expected to have come in at 69.5% in 2021/2022, little changed from the 69.9% projection in the medium-term budget statement. But it improves in outer years and the government now sees it peaking at 75.1% in 2024/2025, down from a previous forecast of 77.8%, and a far cry from immediately after the outbreak of Covid-19 when Ramaphosa’s own advisers suggested that the rate be allowed to go up to 100%.
But the government warned that the outlook was subject to risks, not least pressure to increase spending on social grants, the possibility that legal cases on public-sector wages might go against it and pressure to increase funding for struggling state-owned enterprises (SOEs). The government made no new provisions for SOEs, other than allowing Eskom to use its state guarantee to access funding and redeem some of its debt that’s coming due.
He had some tough words for the utility, which he said had not improved since 2008, despite the amount of money it had received from the fiscus. “Let’s see some action from Eskom,” Godongwana said. “Let’s see a turnaround plan, and let’s see them sell assets.”
The government’s line on fiscal discipline was underlined by its pledge to maintain expenditure growth over the next three years at an average of 3.2%, near the lower end of the Reserve Bank’s 3%-6% inflation target, and well below the 4.5% midpoint.
The National Treasury said it expected inflation to average 4.8% in 2022 and 4.4% the following year. It expects the economy to expand by 4.8% in 2021, then slow down to 2.1% in 2022, before averaging 1.8% in the following two years.
With EFF supporters outside parliament protesting against the government’s decision to get funding from the IMF and World Bank, Godongwana and his deputy, David Masondo argued that those who were concerned about the country’s sovereignty could help by supporting the government’s efforts to implement reforms to boost the economy and control debt.
“The best way to avoid the IMF is to avoid increasing our debt,” Masondo said. “If we don’t do that, other people will come and run our finances.”
The government was also looking at introducing a “more robust” fiscal anchor, acknowledging that its revenue ceiling had not been effective and was often undermined by uncosted decisions such as the multiyear wage increases and the decision on tuition.
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