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Medium-Term Budget Policy Statement 2023/2024

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Resilience amid signs of distress

Balancing debt increases and slowing growth with improving efficiencies and faster economic reforms

The Medium-Term Budget Policy Statement (MTBPS) presented by Finance Minister Enoch Godongwana showed some resilience amid signs of distress but faster implementation of economic reforms and improving efficiency is key.

Economic outlook
The minister announced that economic growth is now set to reach 0,8% in 2023. This is down from the 0,9% forecast in the February 2023 budget. Minister Godongwana also mentioned that growth is projected to average 1.4% from 2024 to 2026 and only in 2026 is economic growth projected to exceed population expansion. He alluded to the fact that these growth rates are not sufficient to achieve the country’s “desired levels of development.”

The Finance Minister mentioned factors demonstrating economic resilience, including real GDP being above pre-pandemic levels, that economic growth is positive in the first six months of this year despite record levels of loadshedding and that certain industries such as tourism and agriculture achieved good growth during the first half of this year. However, South Africa cannot settle for such a low growth trajectory.

The budget deficit has increased by R54.7 billion compared with the 2023 budget estimates for various reasons, including lower tax revenue performance, higher wage bill costs and higher debt-service costs. Of particular concern is the worsening of the budget deficit in 2023/24 fiscal year which is projected to be 4.9% of GDP (up from 4% predicted in February’s budget) and the increasing debt to GDP ratio, which is now set to top out at 77.7% in 2025/26. Debt has grown faster than the economy and it has become increasingly expensive to service. Gross debt will exceed R6 trillion by 2025/26.

Government is therefore focusing on both increasing GDP growth as well as curtailing expenditure and creating efficiencies.

Spending cuts of around R154 billion have been proposed over the next three years. Various efficiency measures were announced by the minister, which could assist in both lowering of expenditure as well as increasing revenue collection.

We welcome the minister’s consistent emphasis on the South African Revenue Service (SARS) improving efficiency. The minister said, “SARS will continue its focus on enforcing compliance in areas such as debt collection, fraud prevention, curbing illicit trade, voluntary disclosures, and encouraging honest taxpayers to comply voluntarily”. Basically, SARS has been given a task to raise an additional R15 billion through these initiatives.

Minister Godongwana also highlighted the work that is to be done to improve energy supply, freight rail, logistics as well as the proposed reconfiguration of government, that is set to take place over the next three years as measures to improve efficiency.

Investment into infrastructure was highlighted as a key to unlocking growth. A new infrastructure financing mechanism was proposed to draw in private sector investment for selected projects and new regulations will be published in the 2024 budget.

The proposed changes to the Urban Settlement Development Grant, the Integrated Urban Development Grant, and the Municipal Infrastructure Grant are to be welcomed, but they should not be used to compensate for municipalities operational failures and should always be utilised as intended.
There is no doubt that our economy is under pressure and global headwinds are not in our favour. Measures around improving efficiencies and increasing the speed of implementation of economic reforms will be essential to navigate through the current turbulence and toward a more stable future.
 
For more
Please click here to download our Deloitte Africa post-MTBPS infographic which provides a high-level overview of the key messages and statistics of the 2023 MTBPS.
 

DO NOT INCREASE TAXES, RATHER IMPROVE EFFICIENCY

 

The Medium-Term Budget Policy Statement (MTBPS), set to be unveiled by Finance Minister Enoch Godongwana on 1 November 2023, comes with the backdrop of poor global and local growth, falling revenues and cost pressures for households, business, and government.

As an alternative to raising taxes, government should focus on improving the efficiency of revenue collection through digitisation, modernisation of tax systems and deploying artificial intelligence (AI).  

An important question that the MTBPS must answer is the true state of government finances as well as the growth, inflation, and job creation outlook.

The Bureau for Economic Research reported last month that inflation expectation across business, labour and analysts have declined for the first time in two years.  However, this piece of good news was followed by the country’s largest medical schemes announcing their customary above inflation increases.

This suggests that medical inflation will remain high into the first quarter of next year, to go with still high food inflation which is also subject to upside risks given El Nino weather patterns, rand depreciation but also risks posed by fuel prices. 

National Treasury may have to revise downwards gross tax revenue of R1.8 trillion announced in the February Budget Review. Tax revenue overruns have disappeared due to slowdown in commodity prices and uneven global growth, which in turn have impacted corporate income taxes. If National Treasury also pencils in lower economic growth (expected at 0.9% at the beginning of 2023), this could see a deterioration of key fiscal indicators  

One mooted option has been to increase value-added tax (VAT), but this is no time to increase VAT. A VAT increase has the unintended consequences of hurting low-income households more and if you do not get the underlying consumption growth, you are not likely to collect more revenue.

The South African Revenue Service (SARS) must instead modernise VAT collection. In a recent paper, SARS argues that unlike other categories of taxes, like personal income tax and customs, VAT has not kept pace with digitisation and updated technology such as e-filing. It is now time to bring VAT collections into the modern age.  

Another way of increasing tax revenues without increasing tax rates is to focus on compliance. Addressing base erosion and profit shifting by multinationals has long been perceived, both in South Africa and internationally, to be a fruitful potential source of additional tax revenues. Indeed, we are seeing significant transfer pricing audit activity from SARS. However, this is not a short-term fix as transfer pricing cases are complex and take a very long time to resolve.  

In July last year, President Cyril Ramaphosa unveiled a six-point Energy Action Plan with short term and long-term measures to address energy supply challenges. The plan entailed improving Eskom fleet performance, speeding up procurement of new capacity and increasing private investment. It also included purchasing power from neighbouring countries while encouraging households and businesses to adopt solar and sell energy back to the grid.

The President has since noted that the regulatory reforms in the energy sector have since led to 12 000 MW of projects committed by private investors. But the time lag between commitment and projects coming on stream is key.

Government has also unveiled the details of the enhanced (additional 25% deduction) renewable energy incentive for rapid private investment in renewable energy assets. The incentive is a brief stimulus intended to accelerate over a two-year window from 1 March this year. The investment is critical for bringing into use additional, renewable energy capacity.  Under the current fiscal constraints, it is not expected to be extended.  

Under the enhanced incentive, the generation capacity limit has been removed to allow for larger power generation projects to access the incentive. However, the long lead times for such projects, particularly due to regulatory requirements, means the two-year investment window may be too short. 

The President has now advised that following the introduction of the incentive and financing mechanism, the amount of roof top solar installed has now doubled to 4500 MW over the past year.  

The SA public debt, including the Eskom bailout announced in February 2023, means that loan debt will rise from R4.73 trillion in 2022/23 (71.1% of GDP) to R5.84 trillion (73.6% of GDP) in 2025/26 and will decline thereafter.
 
Government is now said to have entered “discussion about discussion” on a possible $1 billion to address Eskom and Transnet challenges. The MTBPS must outline how this debt is to be managed and brought within an acceptable level without cutting spending in linked to social upliftment or economically enabling areas such as infrastructure.  
 
Government seems determined to implement the National Health Insurance (NHI), over a period of a decade, despite industry objections. And yet the platform on which the NHI is to be built, the public hospital system, has not been adequately addressed. What looks set to happen now is that this process will be characterised by litigation at every stage. 
 
At the National Budget in February 2023, government announced that it will unveil, at the upcoming National Budget (February 2024), which state-owned enterprises (SOEs) are to be sold or kept. The MTBPS must give an update on this process and what thinking guides it – does government sell only those SOEs that fell prey or could fall prey to state capture? Can you sell a profitable entity? And previously proceeds of privatisation were used to reduce debt, what will the proceeds be used for this time?  We now know from the President that Eskom and Transnet will not be privatised but will have competition and private sector concessions introduced.
 
Lastly, in February, government announced a R910 billion infrastructure programme over the next three years. However, the person meant to drive that process, Dr Kgosientsho Ramokgopa has since been deployed as a minister of electricity, with no replacement announced. This means that an area that is crucial for driving economic growth now faces the risk of being neglected. Government cannot afford to lose time and attention on such an important area.  

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