Finance minister Enoch Godongwana is set to present the 2022 medium-term budget policy statement (MTBPS) on October 26. It is forecast to have a main budget deficit outcome for the current fiscal year of R317bn (4.7% of GDP), mainly due to improved revenue collections, despite slightly higher projections for public sector compensation.
Here is what to look out for in the medium-term budget
On the expenditure side:
1. Public sector wage negotiations:
The long-running standoff between the government and public sector unions over a pay deal for financial year 2022/2023 may be grinding towards a conclusion. Last week, the SA Democratic Teachers’ Union (Sadtu), which accounts for about 260,000 of 1.3-million or so public sector union members, accepted the government’s latest wage offer. Sadtu said the proposed 3% rise in wages, coming on top of the 1.5% automatic pay progression and continuation of the R1,000 a month posttax “cash gratuity”, was fair at this difficult economic juncture.
Analysts said the 3% wage offer is more generous than the 0% assumption that the government embedded into the 2022 budget, which projected growth of just 2.4% in total employee compensation in financial year 2022/2023.
Economists expect Godongwana to pencil in 3% in the expenditure framework. The 3%, on top of the 1.5% notch progression and the R1,000 per month posttax cash gratuity, would “nudge up” the deficit and debt ratios if the amount is not funded by higher projected tax collections or expenditure cuts. Each one percentage point in the public sector pay deal costs the fiscus R6.5bn, or about 0.1% of GDP.
2. Eskom debt reduction
The long-awaited Eskom debt deal is also a key focus of the medium-term budget. All the key stakeholders have been playing their cards close to their chest, and there is no solid insights as to the likely magnitude or the modalities of the deal.
The National Treasury has said that pre- and post-deal conditionalities would be imposed on Eskom to secure any further fiscal support, and it appears that these still need to be agreed upon, especially since Eskom’s newly appointed board would presumably want to weigh in on this important issue. But the broad outlines of a potential deal could be unveiled at the medium-term budget for finalisation and implementation at a later stage.
Absa’s view is that any debt deal will probably incur extra costs for the National Treasury in upcoming fiscal years. There is a view that Eskom is going to need to offload roughly half of its R393bn debt to achieve financial viability.
With Eskom’s annual debt service running at about R55bn on average, relief on half of this would almost equate to the R21bn-22bn that the National Treasury has budgeted to transfer to Eskom in each of the next two fiscal years.
There are suggestions that the National Treasury would then rescind these transfers, but this would then leave Eskom’s net cash flows unchanged, although its credit metrics would improve.
Absa said it is inclined to believe that a viable debt deal would have to entail some net transfer of resources from the National Treasury to Eskom.
3. SRD extension
Another key issue to watch in the MTBPS is the future of the Social Relief of Distress grant (SRD). Introduced at the height of the Covid-19 pandemic, this R350 a month grant to South Africans with no other form of income currently costs the fiscus about R45bn per year. This was funded via the R75bn revenue overshoot the Treasury projected for the current year (in the February Budget Review).
The SRD is budgeted to expire at the end of financial year 2022/2023. The ANC and some parts of the government (especially the department of social development) have proposed converting the SRD grant into a more comprehensive Basic Income Grant (BIG), with more eligibility and a higher benefit level.
In contrast, in September, a leaked paper from the National Treasury argued that the even the SRD in its current form is fiscally unsustainable. The presidency and the National Treasury have debated converting it into a jobseekers/caregivers’ grant, which would effectively reduce the number of recipients and hence almost halve the cost of the programme.
However, with SA’s fiscal performance proving to be quite a bit stronger than expected, chronic and widespread poverty, as well as the ANC’s falling popularity, it is not clear if Godongwana will have any political support within the cabinet for curtailing the SRD, so the medium-term budget is key to watch in this regard.
Should this grant be introduced into perpetuity, it would cost at least R48bn per annum, over and above the R250bn currently spent on social grants (excluding the SRD) in 2022/2023. The current MTEF does not budget for a new permanent grant.
4. Climate financing
The government wants to start accessing part of the $8.5bn in climate financing pledged by some of the world’s richest nations in early 2023. The potential funding, which will be made available over three to five years, was announced at the COP26 climate talks in Glasgow in November.
Under the arrangement, the US, UK, Germany, France and the EU plan to provide finance to help SA cut its use of coal, which is used to generate more than 80% of its electricity. Alexforbes chief economist Isaah Mhlanga said it seems a large portion of this funding is not grants, but loans.
These details matter for credit ratings assessments and the fiscal position of the country. Godongwana is expected to provide detail on the quantum and detail of climate financing.
5. Main budget deficit forecast
Absa now forecasts a main budget deficit of 4.7% of GDP this fiscal year. Considerations about the SRD and the Eskom debt deal will of course have no effect on this year’s fiscal outcome.
Revenues have been stronger than expected in July and consequently Absa now forecasts a revenue overshoot of R87bn relative to the 2022 budget target and their forecast fiscal deficit ratio improves only slightly to 4.7% of GDP (from 4.9% previously).
On the revenue side
Main budget revenue for this fiscal year so far, that is April to August, is up 10.3% year on year compared with the 2022 budget projection of just 2.5% growth for the full financial year 2022/2023. However, revenue growth in the second half of this fiscal year is unlikely to match the pace of the first five months.
Although commodity prices have remained quite elevated, faltering global growth suggests that commodity prices could ease more than consensus forecasts currently suggest.
Absa now expects revenue growth in financial year 2022/2023 of 7.3%, up from 6.5% in the past Quarterly Perspectives. This equates to a revenue overrun of R87bn relative to the 2022 budget target.
1. Personal income tax (about 35.4% of gross tax)
Revenue is up by 8.4% for the year to date compared with the corresponding period in 2021 and 11% compared to 2019. At 8.4% in the year to date, it is slightly ahead of the 2022 Budget Review projection of 6.2% for the current 2022/2023 fiscal year, reflecting resilient growth in compensation of employees despite relatively low employment levels.
2. Corporate income tax (20.5% of gross tax)
Revenue has primarily benefited from export earnings and is up by 14.7% in the year to date compared with the year earlier and up by 88.2% compared with the corresponding period in 2019. This is against the 2022 Budget Review projection for a revenue contraction of 15.2%.
Although it is still too early to tell, with only five months of the fiscal year data available, corporate income tax revenue could perform better than initially projected.
3. VAT (25% of gross tax)
Revenue is up by 11.9% in the year to date compared with the same period last year and 23.6% compared to the corresponding period in 2019. VAT revenue growth of 14.6% for the current fiscal year had been projected in the 2022 Budget Review. Last year, the economy realised VAT revenue growth of 35.2% between April and August. The constrained VAT revenue performance relative to estimates so far reflects the impact of consumer headwinds.
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