Tough love in 2022 budget

By Theto Mahlakoana for EWN

Following years of declining economic performance and crippling levels of growth, the South African economy is finally showing some glimmer of hope.

The 2022 national Budget presented by the National Treasury indeed contains several nuggets of “good news” as projected by economists in past weeks, which will undoubtedly bring much needed relief to cash strapped South Africans.

For the first time since 1990, National Treasury has decided not to increase the fuel levy and Road Accident Fund (RAF) levy that contribute to the hefty costs of petrol and diesel. The decision comes on the back of the RAF as an institutions undergoing serious financial difficulties in the past few years, meaning the government consciously chose to prioritise the needs of motorists. Another feature in the budget that spells important improvement is the narrowing of the national deficit.

“The consolidated Budget deficit for 2021/2022 declined from 8,5% to 5,7% of GDP,” read the detailed budget document.

This was due to an improvement to estimates of tax revenue collections, which exceeded the 2021 Budget estimate by a whooping R182 billion and the Medium Term Budget Policy Statement of the same year by R61,7 billion.

Tax revenue for 2021/22 is expected to reach R1,55 trillion, resulting in tax-to-GDP ratio of 24,7%.
“The revenue performance is largely attributable to elevated commodity prices. Additionally, corporate income and profits have been more resilient than anticipated, with tax collections benefiting from strong but temporary increases in the prices of exports relative to imports. Personal income tax collection has been buoyed by a recovery in earnings. Domestic value-added tax (VAT) collections grew significantly as household consumption was supported by stronger earnings and low interest rates,” read the review.

Although revenue will not be affected by this adjustment, the corporate income tax rate will in future reduce to 27% alongside “base broadening measures”. Another factor mentioned for the better than estimated showing in revenue collection, is the uncertainty in economic and fiscal forecasting caused by the Covid19 pandemic that forced Treasury to limit its projections.

The improvement has spurred Treasury on, with the department confident that if this improvement is sustained over the next three years, government would be able to reduce its debt and close the gap between spending and revenue. “Government will use a portion of higher‐than‐anticipated tax revenue to narrow the deficit while increasing non‐interest expenditure to support economic growth, job creation and social protection”. In past years, the juggling act between spending and revenue has seen government borrowing money from various lenders to fill the gap created by expenditure where there was no financing available.

Personal income tax

Another relief will be found in Personal Income Tax front. Middle income earners will benefit from an adjustment in the income tax brackets, which will see the annual tax free threshold for persons under the age of 64 increasing to R91,250. Medical tax credits will increase from R332 to R347 per month for the first two members and from R224 to R232 per month for additional members.

“If the personal income tax brackets were not adjusted, revenue would have increased by R13.5 billion,” said the Treasury. It further states that: “The 2022 Budget provides R5.2 billion in tax relief to support households
and the economy by not adjusting the general fuel levy and the RAF levy, while fully adjusting the personal income tax brackets and rebates for inflation,” said the Treasury.

Social grants

The government has also allocated R58,6 billion rand to the Department of Social Development. The money will be spent on the various support programmes in place, with 18,6 million beneficiaries. Treasury has also resolved to implement a new initiative for extended child support grant for double orphans to encourage the care of orphans within families rather than foster care. For the 2022/23 financial year, the grants will be adjusted as follows:

  • Old Age increases by R90
  • War Veterans increases by R90
  • Disability and care dependency grants increase by R90 in April and a further R10 in October.
  • Foster Care increases by a once off R20 in April
  • Child Support Grant increases by a once off R20 in April

The recently extended Social Distress Grant has been allocated R44 billion for another 12 months from March. The relief provides R350 to unemployed South Africans and came into effect at the onset of the COVID-19 pandemic.
In a briefing with journalists before the budget speech presentation in Parliament, Finance Minister Enoch Godongwana said government would review all assistance programmes including the Extended Public Works Programme to come up with an optimal way of support for the poor. “We don’t fund permanent problems using temporary revenue,” he said.

Godongwana further explained that this would be the work carried out in response to the calls for a universal Basic Income Support or Grant. South Africa now pays grants to more than 46% of the population. In total, the Department of Social Development’s estimated 96,6%, which amounts to R684,4 billion of its budget in the next three years financing the social grants. The new extended child support grant for double orphans in the care of relatives will cost R1,6 billion.

Tough love for SOEs

In a change of direction, the National Treasury has finally cut off underperforming state-owned companies with the exception of Eskom, adding that only those entities that meet the conditions for bailouts would receive assistance.
Godongwana said that there would be no “blanket support” for SOEs anymore. In the case of the embattled Eskom, the minister stressed a point he has raised before, that Eskom has been struggling since 2008 and it is no better now but continues to receive government funding.

He also explained that they are aware that the power utility’s debt situation remains a concern for creditors and investors alike, which is why Treasury would continue to support it to remain financially sustainable during its transition. Eskom will receive a further R88 billion until 2025/26 to pay off its debt in addition to the R136 billion it has already been allocated. Arms manufacturer Denel will receive R3 billion this financial year to implement its strategic plan to consolidate operations, dispose of non-core assets and move ahead with its “identified strategic equity partnerships”.

Overall spending

The consolidated government expenditure for 2022/2023 is R2,16 trillion, with R1,3 allocated to social services. Other spending includes:

  • SAPS – R120 billion over the next three years
  • Law courts and prisons – R50,8bn
  • Defence and State Security – R50bn
  • Health – R259 bn
  • National Student Financial Aid Scheme R46,1 bn
  • Basic Education R282,8 bn
  • University Transfers R48,7 bn
  • Community development including municipal equitable share R236,3 bn
  • On security, Gondongwana said the country’s security could not be jeopardised over a lack of resources, as he motivated for the allocation of funds to the SAPS. The police department failed to spend about R4 billion of its budget over the past three years.

Meanwhile, the government will spend R301,8 billion on debt service costs and it confirms in the budget documents that it will be going to market to source even more loans to supplement the fiscus. The World Bank recently lent South Africa R11 billion for its COVID-19 pandemic programmes. The Budget documents also flag that global uncertainties and uneven domestic recovery will weigh on the economic outlook over the medium term.

“Government faces large spending pressures, including the risk of higher‐than‐budgeted public‐service wages, demands for additional funding from financially distressed state‐owned companies, and calls for permanent increases in spending that exceed available resources,” read the budget review.

National Treasury also said a labour summit would be held in March with public sector trade unions to devise a way forward regarding the public wage bill. This as it has become evident that the timing of wage negotiations and the tabling of budgets clash and as government persistently fails to see fruits of its efforts to cut the wage bill.

Spending on compensation of employees continues to be the largest component of current spending, but declines from 36% in 2021/22 to an average of 35.1% over the medium term. The government was hoping for an even wider margin. Despite the persistent challenges the country’s economy continues to face with the unemployment, inequality and poverty crisis worsening, Godongwana described the 2022 Budget as a “good story to tell”.

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