2023 Budget – awaiting political consolidation

Image: Mediamodifier on Unsplash.

With real economic growth projected to average just 1.4% over the next three years, Minister Godongwana had little room for manoeuvre.

“Consolidation” has been the central theme of fiscal policy at least since 2018.

This budget again signals expenditure reductions in real terms, and below-inflation adjustments to public service remuneration.

The revenue outcome for 2022/23 will exceed the original estimate by over R90 billion, with the gains largely going to reducing the budget deficit. The Treasury will start the 2023/24 year with cash balances of R235 billion, effectively pre-funding a substantial part of next year’s borrowing requirement. The share of outstanding bonds held by foreign investors has declined from 41% in 2017 to 26% in December 2022, and the average term to maturity is over 11 years.

Prudent and forward-looking debt management remains a hallmark of the Treasury’s stance.

This is an important backdrop to the central feature of the 2023 Budget – the Minister’s announcement of a R254 billion debt relief programme for Eskom. Over the next three years the Treasury will provide cash transfers to Eskom (written up as subordinated loans) to cover its debt redemption and interest obligations. In the final year, a further R70 billion in Eskom debt will be taken over. Taxpayers are, in effect, standing in for Eskom’s customers and compensating for its cost overruns and system failures. While the debt takeover cannot itself relieve the electricity crisis, the reduced debt liability makes it possible to complete Eskom’s separation into financially viable transmission, generation and distribution businesses. Implicit in the conditions attached to the debt relief package, private investors will in future be partners in financing the capital requirements and operation of Eskom’s remaining generation plants.

South Africa’s institutional investors and pension funds have long sought appropriate vehicles for contributing to the meeting of infrastructure investment needs. Alongside this potential concessioning of power plants, Transnet has recently announced that it is seeking a private partner for its main Gauteng-Durban freight rail service. Annexure D of the Budget Review outlines considerable progress in clarifying how “blended finance” arrangements are being implemented and how the public-private partnership regulations will be adapted to facilitate more streamlined project funding. There is an increasing number of infrastructure projects listed as “in implementation” or close to financial closure, in a wide range of sectors: bulk water supply, housing, hospital construction, schools, water treatment, port facilities and student accommodation, amongst others. It has been a long, slow evolution of infrastructure plans and processes, but it seems likely that public investment project implementation will gather momentum over the period ahead.

The Budget Review signals clearly that the Treasury sees an investment recovery by both the public and private sectors as the key to improved economic performance. Tax concessions have been announced to encourage businesses and households to invest in renewable energy capacity. In the present circumstances, energy-intensive projects and industries reliant on freight rail are likely to be held back. This is an opportunity to diversify into other sectors. As a component of a development strategy focused on improving living standards, investment in housing and township renewal is critical. This is largely about municipal initiatives, and especially those of our cities. The Treasury’s extension for a further two years of the urban development tax incentive is a welcome contribution to building an enabling environment for accelerated investment in urban infrastructure. Progress will depend, however, on effective responses to both administrative bottlenecks and disruptive interference with construction and building projects.

South Africa’s retirement and long-term investment funds are powerful vehicles for mobilizing the capital required for a growing economy. Tax provisions underpin these arrangements: the Treasury’s estimate is that deductibility of retirement fund contributions accounted for R97.7 billion in revenue foregone in 2020/21, or about 40% of all tax expenditures and 8% of gross tax revenue. It is also evident that the retirement fund reforms of recent years have improved the effectiveness of the system in lifetime income smoothing. Reforms currently under discussion will assist further in securing provision for retirement while providing access to funds to meet pressing needs.

The 2023 Budget contained no tax policy surprises, except perhaps that full relief was provided for the effect of inflation on personal income tax. The social relief of distress grant was extended for a further year, while the Treasury again indicated that it sees replacement of the present grant with more extensive income support as a major fiscal risk.

The Budget delivered Eskom debt relief and tax incentives for energy investments, as was widely anticipated. For the rest, it might be characterised as a holding operation.

Bolder fiscal projections await political consolidation behind a much-needed coherent growth strategy.