Economic Outlook and the Fiscal Framework
Despite growths in the periods between 2020Q3 and 2021Q2, since the first wave of COVID-19 arrived on South Africa's shores, the trend remains temperamental as the latest GDP showed a significant 1.5 per cent decline in 2021Q3. In terms of levels, the current productivity is equivalent to that last seen in 2016 at real prices. Hence, it is improbable that the economy shall return to pre-pandemic production levels within the year as the National Treasury projects (see FFC's 2022/23 Annual Submission for the Division of Revenue).
Risks to the economic outlook remain elevated in external conditions, such as gloal supply-push and demand-pull inflation tail swipes due to extensive COVID interventions, resulting in faster‐than‐expected global interest rate increases. The current conflicts with sanctions in the northern hemisphere may disrupt supply channels and demand for exporting raw minerals, notwithstanding the domestic economic issues such as interruptions in power supply, labour market rigidities, and fiscal challenges of escalating debt-service costs and policy uncertainty.
The government remains committed to consolidating the public finances while providing immediate support for the pandemic response, job creation and social protection in the 2022 Budget. This effort is supported by better‐than‐expected revenue collection due to the commodity cycle, with an anticipated primary (i.e. fiscal balance net of interest payments on general government liabilities) surplus in 2023/24 and the consolidated budget deficit narrowing to 4.2 per cent of GDP by 2024/25. Gross debt stabilises in 2024/25 under the 80 per cent ceiling.
The special COVID‐19 social relief of distress grant will be temporarily extended. Any permanent extensions of social support need to be matched by new tax measures or expenditure reductions for reprioritisation.
Revenue Trends and Tax Proposals
Tax revenue strengthened significantly in recent months above projections due to the commodity cycle and resumption of business activities. To support this improvement, the government proposes R5.2 billion in relief as neither the general fuel levy nor the Road Accident Fund levy will be increased and boost incentives for youth employment. Further relief is provided through an inflationary adjustment in personal income tax brackets and rebates at 4.5 per cent, thereby alleviating the tax burden on lower-income earners.
Over the past two years, tax policy has focused on broadening the tax base, improving administration and lowering tax rates. The government intends to continue with this approach by avoiding tax rate increases to the degree possible, subject to significant expenditure decisions. The Commission supports this approach to grow the tax base instead of tax rate based on the empirical research conducted in its 2022/23 Annual Submission for the Division of Revenue.
Consolidated Spending Plans
The R282.3 billion increase in non‐interest spending over the medium‐term expenditure framework (MTEF) 2022-2025 period compared to the 2021 Budget is accommodated through the improvement in tax revenue collections, thus not jeopardising the path to deficit reduction and fiscal consolidation.
Additional allocations of R110.8 billion in 2022/23, R60 billion in 2023/24 and R56.6 billion in 2024/25 are made for several priorities that could not be funded through reprioritisation. These include the special COVID‐19 social relief of distress grant, the continuation of bursaries for students benefiting from the National Student Financial Aid Scheme, and the presidential employment initiative.
Debt‐service costs will average R333.4 billion per year, account for 15.1 per cent of total spending and grow faster than all functions, including learning and culture and health. It is imperative that the government actively reduces the crowding‐out effects of debt‐service costs.
Division of Revenue and Spending by Provinces and Municipalities
Provinces and municipalities must focus on improving critical social and basic service delivery. Over the medium‐term expenditure framework (MTEF) period, after providing for debt‐service costs, the contingency reserve and provisional allocations, 48.8 per cent of nationally raised funds are allocated to the national government, 41.4 per cent to the provincial 9.8 per cent to local government.
The local government's allocation share has increased at the highest rate relative to other spheres of government at an 8 per cent annual rate, at R30.7 billion over the medium term. Provinces shall receive an addition of R58.4 billion over the same period, growing at 1 per cent, while national government at a negative 1 per cent annual rate.
Government Debt and Contingent Liabilities
The gross borrowing requirement decreased from a projected R547.9 billion to R412 billion in 2021/22. Due to elevated redemptions over the medium term, the borrowing requirement is set to peak at R487.6 billion in 2023/24.
Gross loan debt is expected to increase from R4.35 trillion (69.5 per cent of GDP) in 2021/22 to R4.69 trillion (72.8 per cent of GDP) in 2022/23 and will stabilise at R5.43 trillion (75.1 per cent of GDP) in 2024/25 – a year earlier than projected in the 2021 Budget.
South Africa's cost of funding has declined marginally due to a relative decrease in risk and return differential with its peers and concessional loans. However, tightening global and domestic monetary conditions due to fears of post-COVID international inflation tail swipe may lead to our creditors' abrupt increase in funding costs and redemption demands.
The Commission recommends the government prioritise the implementation of consistent capital and labour market reforms to improve labour agility and ease of doing business and close down non-viable financial and non-financial institutions with haste.
Financial Position of Public Sector Institutions
In 2021/22, state-owned companies made limited progress in their reforms. Although Eskom has registered its transmission business as a subsidiary, the process of unbundling its operations is proving complicated.
Over the past 12 months, several state‐owned companies have missed their capital investment and loan disbursement targets. The COVID‐19 pandemic and associated lockdowns reduced operational income and slowed restructuring plans, further affecting unsustainable business models that often require state intervention.
As per the recommendation of the Commission in 2019 regarding Fiscal Rules governing contingent liabilities, the National Treasury will publish a framework outlining the criteria for funding state‐owned companies to manage this significant area of fiscal risk.
The financial positions of the Unemployment Insurance Fund and Compensation Fund are strong and set to improve over the medium term. Still, these are offset by the persistently large liabilities of the Road Accident Fund. By 2024/25, combined social security fund liabilities are projected to be R305.5 billion larger than assets.
