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“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” A quote from Mr Micawber in Charles Dickens’ novel David Copperfield.

“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

The last time that the government spent less than it received and so achieved the “happiness” result was back in the 2007/08 fiscal year. Since then, we’ve racked up 15 consecutive years of a “misery” result. Ahead of this year’s National Budget there were expectations that government revenue would overrun initial estimates and reduce the budget deficit estimate of 4.9% of GDP as presented in the Medium-Term Budget Policy Statement (“MTBPS”) in October. The peak level of sovereign debt that was forecast in the MTBPS at 71.4% of GDP was, however, expected to be moderately worse than that estimate. The question of the magnitude of Eskom debt that government would take over (and the timing and approach) was also expected to be finally answered in this budget. What was not so certain, was the degree to which the budget estimates of the next three years would change, given the stalling of the domestic economy (thanks in large part to load-shedding) and the significant pullback in the commodity prices that fuelled the tax revenue boon from mining companies.

In presenting the 2023/24 National Budget, Finance Minister Enoch Godongwana took just 50 minutes to detail a budget with no corporate, VAT or personal income tax changes (other than adjusting for inflation-induced fiscal creep), no fuel levy or Road Accident Fund changes and only inflation adjustments (around 5%) to social grants, tax rebates, medical tax credits, excise duties (“sin taxes”) and levies. The flexibility that National Treasury had with the budget this year was the result of better-than-expected tax revenue collections. While the market was expecting revenue collections to slow in the final months of the fiscal year, the Finance Minister announced an estimated R1.69 trillion revenue for 2022/23, R10.3bn more than was estimated in the MTBPS in October and R93.7bn more than was estimated in the National Budget last year. That additional revenue also allowed for a 10% increase in retirement fund withdrawal levels and the brackets of the transfer duty table.

The National Treasury readjusted its economic outlook closer to current market thinking and projected 0.9% growth for this year, 1.5% for next year and 1.8% for 2025. The whole budget hangs on these assumptions which unbelievably still appear to be optimistic. The risk is that growth prints lower than expected and that hurts actual revenue received versus budgeted revenue (driving the deficit wider). In the eyes of the Treasury, inflation is set to moderate to the mid-point of the target range over the forecast period with the current account deficit deepening over the next three years. These are more in line with current market thinking.

On the expenditure side of the budget (R2.24 trillion) there were a few noteworthy items such as the R7.8bn allocated to the South African Police Force, R1.3bn to the National Prosecuting Authority and R3.1bn to the Department of Defence and a proposed allocation to the South African Revenue Services budget. The more contentious expenditure was an allocation of R1bn to South African Airways and R2.4bn to the South African Post Office – with apparent strict conditions. An unresolved issue in the budget was any planned increase for public servants. Negotiations are ongoing with unions and so the minister avoided putting a figure to any future wage hike. The previous government wage increase offers (which started at zero not too long ago) are below the inflation rate and that’s unpalatable for the unions and leaves a public sector wage strike a possibility in the near future.

Two headline-grabbing issues were always going to be the Eskom Debt Relief Programme and the solar subsidies for households mentioned in the State of the Nation Address a fortnight ago. The 25% rebate on solar panels to a maximum of R15,000 will hardly get the lights blazing. R15,000 off a R200-R300k price tag is hardly going to entice households to suddenly install a solar system. Those already in the market for solar will benefit but it’s not going to help those who can’t afford it anyway. Aside from the damp squib that was solar, the Eskom Debt Relief Programme announced in the budget provided some clarity on the scheme but can also hardly be considered unexpected in any real way. Government will take on R254bn of Eskom debt in three tranches (R78bn, R66bn and R40bn in the next three respective financial years) with a direct take-over of up to R70bn of Eskom’s loan portfolio in 2025/26. Good news for Eskom, in that it can get on with sorting itself out (subject to strict constraints on how to spend the money) but bad news for government and taxpayers in that South Africa’s sovereign debt level takes a big unwanted step higher.

Sovereign debt levels were slated to peak at 71.4% of GDP this year before heading slowly lower but the take-on of Eskom’s debt has pushed the peak up and out to 73.6% of GDP in 2025/26. The threat of a public debt trap looms large at those levels and while that eventuality may be avoided, the cost of servicing the existing stock of government debt is debilitating. If one strips out government interest payments on its debt, the rest of the budget is in surplus. This year government will spend R341bn on interest. That amount is more than being spent on health (R259bn), peace and security (R227bn), community development (R259bn) and economic development (R238bn). Debt-servicing costs are the third largest line item in the budget behind learning and culture (R457bn) and social development (R378bn). Apart from that, the interest bill is the fastest growing item in the budget and grows at 8.9% p.a. over the next three years.

The heady debt levels and the burgeoning interest bill can only really be solved by economic growth. The country needs to see an increase in economic activity that will generate greater tax revenues to help reduce the budget deficit, reduce the stock of debt and reduce interest payments in order to spend more of the heard-earned revenue on social development and growth projects. A stable electricity supply is a basic requirement to get growth going but the economy also needs more investment to create more employment to get more citizens economically active and fewer citizens dependant on social grants (19.6m people by March 2026). The Finance Minister announced R903bn of infrastructure investment over the medium-term but we need so much more than that and we need to see that money being spent.

There is a long path from misery to happiness but hopefully the steps taken on Eskom in the budget will at least help illuminate that path.

About the Author

Craig Pheiffer
Chief Investment Strategist: Sasfin Wealth, Sasfin Wealth

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