The information around the 2023 Minster of Finance Budget Speech that we shared with you last week largely touched on the tax proposals put forward – from rebates for solar installations and increases in thresholds for Transfer Duty, to inflationary adjustments, to the income tax tables for individuals. 

Nothing too exciting (which is not a bad thing), but there is a general sense that more could have been done to incentivise individuals to reduce their reliance on Eskom. While the objective of incentivising additional generation capacity makes sense, the incentive could have been extended to inverters and batteries as well, provided they are part of a complete commissioned solar generating system; without the inverter and batteries, the panels are pretty pointless. In addition, the supply and installation of solar systems could have been zero-rated for VAT purposes as well.

There is also an ongoing narrative that the private sector and business should become part of South Africa’s solutions to its larger set of challenges, which go far beyond load shedding. Whilst giving your business a fighting chance of survival may arguably be enough of an incentive to take matters into your own hands when it comes to power generation, water supply and sanitation, infrastructure, security, and healthcare, food and housing for your workforce, could Government do more to incentivise business to bankroll and execute in areas that it has failed to do so? A resounding YES, but this goes beyond tax incentives – it requires Government to uphold its side of the social contract, to provide the necessary foundations for the expected public/private partnership, and most importantly, to respect the less than 200,000 corporate and individual taxpayers that carry at least 60% of the total tax burden in South Africa.

Although not related to the Budget Speech itself, the Minister of Finance did indicate in his speech that South Africa may be grey listed by the Financial Action Task Force (“FATF”). This did eventualise last week and the FATF placed South Africa on its ‘Increased Monitoring’ list. This means that South Africa will be subject to increased monitoring while it addresses and resolves the various deficiencies that were identified within agreed timeframes. This grey listing has a negative impact on South Africa in a number of areas: currency devaluation, increased financing costs, longer transactional lead times on cross-border deals, reduced inbound investment (both direct and portfolio) and reputational damage to name a few. South Africa is now part of 23 grey listed countries, which include nine other African countries – the Democratic Republic of Congo, Mali, Mozambique, Nigeria, Senegal, South Sudan, Tanzania and Uganda. South Africa will be hoping that our Government and other institutions take this seriously to ensure grey listing status is removed as soon as possible.

The following observations on the general economic aspects of the Budget Speech are of interest:

• The Budget balance, or the difference between the budgeted revenue and the budgeted expenses, shows a shortfall of around 4% to Gross Domestic Product (“GDP”) for the 2023 fiscal year and the next two fiscal periods, with a shortfall of 3% in the 2026 fiscal year. For perspective, we are spending around R280 billion a year more than what we collect. That means we must borrow that money to plug the gap, but more on that later. If the revenue projections are not realised or the expenditure is higher than estimated, that budgetary shortfall can become much larger and is therefore very reliant on the forecasted economic growth being realised and fiscal spending discipline being maintained.
  
  
• The total Government spending for the 2023/24 fiscal year is R2.24 trillion, of which R1.35 trillion, or 60%, is spent on social services, which covers learning, health, grants and community development. The next biggest ticket item is interest on Government debt, which at R341 billion, represents 15% of spending. That leaves the remaining 25%, or R539 billion, to pay for economic development, peace and security, and general public services.
  
  
• Back to borrowing money to plug the gap in the Budget; Government estimates its debt to increase to about R5.1 trillion in the 2023/24 period and to pay about R340 billion in debt servicing costs. Debt of R5.1 trillion equates to a debt to GDP ratio of 72.2% which will continue growing to about 75% in the following two fiscal periods, along with an interest bill of around R400 billion. Back in 2008/09 Government debt was less than 25% of GDP – in 15 years South Africa has managed to triple its debt levels relative to the size of our economy and all there is to show for that is a multitude of corruption scandals and infrastructure projects that leave a lot to be desired. Of ongoing concern is that South Africa keeps incurring long-term debt to fund short-term expenditure, a bit like taking out a 20-year loan to buy groceries and fund overseas holidays. Whilst the Minister of Finance must be credited with keeping certain expenditure in check, it will be a challenging task when the budgeted public wage bill increase is just over 3% and the expectation from unions is around three times higher, especially so close to general elections.
  
  
• GDP growth is forecasted by the Minister of Finance to be in the region of 1.5% in 2024, going up to 1.8% in 2025. Most economic commentators have lauded this as being optimistic; the issue with an overly optimistic growth forecast is that when you get it wrong, all the forecast and ratios around revenue collection, budgetary shortfalls, debt levels and debt servicing costs are inaccurate. On the over end of the spectrum, India is forecasting growth of almost 7% over the medium-term.
  
  
• Inflation is being estimated to be around 5% in the short-term.
  
  
• The Government continues to bail out state owned enterprises and their equivalent – Eskom gets R254 billion, South African Airways gets R1 billion to assist the business rescue process and the South African Post Office gets R2.4 billion to implement its turnaround plan. The Land Bank remains in financial distress and the process to finalise a solution is ongoing – in the meantime it will get a R5 billion allocation from the 2022/23 contingency reserve. Also coming out the 2022/23 expenditure is a “special appropriation” of R30 billion going to Denel, SANRAL and Transnet.

With the high levels of uncertainty across the globe about everything from inflation and interest rates, to where the conflict in the Ukraine will take us and the impact of extreme weather conditions on our daily lives, South Africans can only hope that Government will start making the necessary change to ensure we are removed from the grey listing, so that South Africa’s economy and markets can recover as soon as possible.

We continue to live in hope that bold action will be taken to address the root causes of the negative factors affecting our country and that our messaging can be far more positive this time next year. To finish on a positive note, with adversity comes opportunity, so we should all be attentive to the potential prospects for investment, deals, learnings and growth which may present themselves!

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