Budget Speech 2023: Hopes, Expectations and Reality
When the finance minister presented his budget speech a year ago the socio-politico-economic environment was inhospitable; if anything the operating environment this year is even worse.
By virtue of having an open economy, the South African economy is not immune to the direct and indirect effects of global events, trends, and shifts. The period of fiscal decline in South Africa coincides with the tempestuous and disconcerting global conditions that have prevailed since 2008/09. We felt the vicious backlash of the 2008/09 financial and real economic crisis. The legacy of this crisis lingered for another decade, only to be followed by the pandemic-induced crash of 2020. Within just over a decade, therefore, the world - and South Africa – suffered the devastating impact of two of the worst recessions ever recorded. It should also be noted that even before the onset of the Covid-19 crisis, South Africa had entered a technical recession.
In 2021, across the globe, as well as in South Africa, economies experienced significant speeds of expansion. However, this was largely a statistical rebound from the record lows in economic activity recorded in 2020. Meanwhile, during the course of 2021 inflation rates across the globe started rising, after having been exceptionally low for longer than a decade. Inflationary forces have been aggravated by the Russia-Ukraine conflict and the associated pressures on energy, feedstock, and food prices. By the second half of 2022 inflation rates in the USA, Britain, and Europe had accelerated to levels last recorded three to four decades ago. As is their wont, central banks in numerous countries have reacted by raising interest rates aggressively in an attempt to curb the speed of further price increases. Inasmuch as higher interest rates tend to suppress consumer and business spending, there is a more than even chance that another economic recession is on the cards. At the very least, a period of stagflation awaits the world in 2023 – an uncomfortable combination of inflation, and sluggish and tepid economic growth. Looking beyond 2023, global growth prospects remain tepid in the wake of disrupted global supply chains, record high levels of sovereign debt (that will have to be drawn down sooner rather than later), the faster-than-expected slowdown in economic activity (as well as emerging demographic imbalances) in China, and the possible extension of the emerging trend towards de-globalisation.
Domestically, economic, financial, and fiscal conditions remain severely stressed. The growth recovery is tepid and way below the pathway required to make meaningful inroads into the triple challenge of poverty, inequality and unemployment. The latter, which has been chronically high for the best part of two decades, is in excess of 30% (excluding discouraged work-seekers). A year ago, rolling blackouts were sporadic and irritating; today load-shedding is pervasive and intrusive. According to some estimates this alone shaves off up to two percentage points of economic growth. Moreover, as has been the case internationally, mounting inflationary pressures have prompted a series of increases in the policy interest rate. These unfortunate events exacerbate a pre-existing set of structural imbalances that have hamstrung the economy for over a decade. For instance, South Africa has, for a number of years, been running significant and at times widening savings, government and current account deficits.
Of particular relevance, on the eve of the 2023 Budget Speech, is the government’s high level of indebtedness. In essence, for the past decade the level of debt has consistently risen at a faster rate than the GDP; consequently the ratio of public debt-to-GDP has reached a critical level (approximately 75%) where investors in government bonds (creditors) demand a higher interest rate to compensate for higher risk. As interest rates rise, it becomes more expensive to refinance existing debt and to finance new debt. Moreover, since more government revenue has to be allocated to the servicing of debt, less is available for crucial government services. In addition, government debt has been incurred to finance mainly current expenditure (including civil servant salaries, social grants, and interest on previously incurred debt). This means that the burden of the debt is exacerbated since it is not making any meaningful contribution to the future production capacity of the economy. In short, as a result of excessive non-growth creating borrowing in the past, government is simply not in a position to embark upon the expected policy approach to counteract recessionary conditions, viz. a programme of fiscal expansion. In the longer term, capital expenditure by government (especially on much-needed economic infrastructure) will be crowded out by far less productive current expenditure.
All of this brings us to the expectations that South Africans have when they consider the Budget Speech. First, a few important clarifications. What we hope the minister will address is not the same as what we expect him to address. To hope for something is to want something to happen or be true, while an expectation is what we think will happen. In turn, expectations rarely match reality, i.e. what actually transpires, This gap between expectations and reality can lead to feelings of unhappiness, resentment, and even anger. To further complicate matters, different societal actors may have hopes and expectations that are diametrically opposed:
- The corporate sector and investor community will hope for a significant trimming of the budget deficit, leading to a steady decline in the government debt-to-GDP ratio. They would also like to see a coherent programme of the selling off/ privatisation of dysfunctional state-owned enterprises, along with policy consistency and implementation, institutional competency and integrity, the further easing of the corporate tax burden, and the end of load-shedding.
- Small- and medium-sized enterprises will hope for tax breaks, a relaxation of labour legislation, reduction in red-tape, and the end of load-shedding.
- Middle-income households will be on the lookout for lower personal income tax rates, a credible and visible anti-corruption plan of action, a less volatile exchange rate, and the end of load-shedding.
- Organised labour movements and the unemployed will hope for a significant increase in the number of job opportunities, higher minimum wages, and the end of load-shedding.
- Public servants will hope for inflation-linked wage increases, a cessation of retrenchments, and the end of load-shedding.
- The heavily disadvantaged members of society will be hoping for the extension of social grants, the lowering of the VAT rate, increased spending on education and health care, cheaper and more reliable transport, and the end of load-shedding.
Of course, even with the best will in the world, it is impossible to deliver this wish-list in its entirety. Starting with the potential level of government spending : this will be constrained by a very slim expansion (if any) in the tax base, on the back of the constrained economic growth environment. Last year, the commodity price boom and relative buoyancy of economic activity provided higher-than-expected tax revenue windfall. This year, the improved tax collection efficiency should enable SARS to meet its budgeted goals, but no additional windfalls are anticipated. As pointed out earlier, fiscal prudence is imperative to stabilise the perilous public debt situation. This means that debt financing should not be used as a means to finance current government expenditure.
Two areas of spending have taken centre-stage in recent times. First, there is bound to be a significant allocation of resources to the Eskom crisis – both in the form of additional financing of the SOE’s deficits and allocations for diesel acquisitions. Presumably the finance minister will also provide details on the tax rebates on solar panel installations referred to by the president in his recent State of the Nation Address. Secondly, the arrangements with regard to the duration, magnitude, and the beneficiaries of social security grants will undoubtedly be announced. For the time being, it seems unlikely that this area of spending, which already accounts for some 17% of total government spending, will decline.
Another key area of public spending, which has a major bearing on the public debt trajectory, is the remuneration of government employees, which is equivalent to almost 15% of the GDP (one of the highest ratios in the world). A reduction – or at least a stabilisation - of this wage bill is, from a financial and economic perspective justifiable. Politically, however, this could feasibly create a highly inflammable situation, particularly in light of the pre-2024 election volatility that possibly lies ahead.
Regarding tax arrangements:
- As is customary, we can expect an increase in “sin tax” rates, as well as possibly the fuel levy.
- An increase in the VAT rate is unlikely.
- Treasury might consider postponing further planned reductions in the corporate tax rate.
- There is very limited leeway for a meaningful reduction in personal income tax rates.
In the final analysis, we should not lose sight of the fact that the budget speech is, in essence, a three-year review of projected government expenditure and revenue. As such, its primary purpose is not to serve as a blueprint for sustained economic recovery and transformation. By spelling out the intended allocation of the revenue to various government programmes, the budget speech provides an indication of the government’s priority preferences and objectives.
Nor can the Budget Speech, even at the best of times, be all things to all people. In times of severe external constraints, and self-imposed internal structural imbalances, the limitations are even more stark. This year the gulf between various stakeholders’ hopes, expectations and the ultimate reality will possibly be greater than ever before. That said, the majority of South Africans will probably hope to see, at the very minimum, a plausible, workable, and sustainable plan of action to minimise the debilitating impact of daily power shortages. Just as important is the desire for unequivocal evidence of the restoration of the competence and integrity of our democratic institutions.