With social grants likely to become a permanent feature, finance minister Enoch Godongwana is expected to detail in his budget on Wednesday how the government will try to balance social protection with keeping debt in check.
Last month SA received approval for an R11bn International Monetary Fund (IMF) loan to beef up its Covid response as the stretched fiscus slowly recovers from the pandemic. While the terms are favourable, debt service costs threaten to crowd out service delivery and social spend.
Miyelani Mkhabela, CEO and chief economist at Antswisa Transaction Advisory, says: “The minister of finance must give confidence to the nation on debt restructuring mechanisms and the agreed revised repayments terms annually, as the IMF expressed concerns about South Africa’s outlook that remains precarious.”
The IMF said last week the economy faced structural constraints, weak confidence and less favourable terms of trade.
It forecast 4.6% economic growth in 2021 and 1.9% in 2022, with an average of 1.4% over the medium term.
The IMF highlighted the main risks as slow progress in the implementation of structural reforms, tightening of global liquidity conditions and the operational and debt problems at Eskom.
That still leaves us with a precarious and unsustainable debt trajectory. If he uses most or all of this windfall then the markets and ratings agencies will punish him
— Economist Dawie Roodt
Improved revenue generation will likely mean limited tax increases. Indications are that in the year to date corporate income tax, personal income tax and VAT have outperformed the National Treasury’s estimates.
FNB economist Siphamandla Mkhwanazi said that at just over R1.1-trillion year-to-date, gross tax revenue is already running at 76.4% of the R1.48-trillion that the Treasury estimated in the 2021 medium term budget policy statement.
“This revenue performance was largely supported by a swift recovery in labour income, increased household expenditure and higher commodity prices that have underpinned the mining sector’s strong contribution to corporate income tax revenue,” he said.
Mkhwanazi’s forecast for economic growth is 2.2% in 2022 and 1.7% in both the following two years. “We believe that long-term economic growth could be higher if economic reforms and infrastructure investment are accelerated,” he said.
Kyle Mandy, PwC head of tax policy, said a revenue windfall is expected to be mainly drawn from corporate taxes generated by mining companies riding the wave of the commodity boom.
The better-than-expected tax revenue will be a reprieve amid fiscal constraints and high unemployment exacerbated by waning business and consumer confidence. The promising figures come as the government extended protection to shield the unemployed from poverty, and after violence and looting in KwaZulu-Natal and parts of Gauteng in July last year underscored the fragility of SA's social fabric.
President Cyril Ramaphosa extended the R350 a month social relief of distress grant for another year. He said this week in his response to the parliamentary debate over his state of the nation address that SA needed to achieve a minimal level of protection for those who cannot find work.
But Mandy said: “We have to be cautious that the debate around the implementation of a basic income grant doesn't distract us from other issues, not least the public sector wage bill.”
Dawie Roodt, chief economist at the Efficient Group, said what Godongwana should do and what he is likely to do are two different things.
What he should do is to use the tax windfall to reduce borrowing because SA is heading for a fiscal debt trap, Roodt said. “However, he is likely to use some of this windfall ... to pay for the extension of the Covid grant [R50bn], and to give the civil servants a bit of a sweetener and other odds and ends.”
Roodt expects Godongwana to use about R100bn of the windfall, and divert the rest to reducing the deficit and possibly giving some support to state-owned enterprises.
“But that still leaves us with a precarious and unsustainable debt trajectory. If he uses most or all of this windfall then the markets and ratings agencies will punish him,” said Roodt.
Jeffrey Schultz, senior economist at BNP Paribas, says he fears the state could increase public sector wages later this year to avoid what would be an almost inevitable clash with unions as a result of the positive tax revenue outlook.
“We see this as less of a ‘populist’ tilt and more of a pragmatic, probably moderate, shift to avoid a major confrontation between the government and the unions,” he said.
Last year, the government signed a one-year wage deal with public sector unions after months of negotiations.
