Finance Minister Enoch Godongwana presented a solid budget, balancing the need for extra expenditure in critical areas but with a strong focus on stabilising debt. We believe the markets will react positively in that he has addressed the country’s critical problem areas while retaining fiscal discipline, which has been the hallmark of both his and his predecessor Tito Mboweni’s time as finance minister.

As a result of the fiscal consolidation strategy of the past few years, he was able to bring down the fiscal deficit without resorting to tax increases or further cuts in the social wage and infrastructure. He said a primary fiscal surplus would be achieved this fiscal year and the consolidated fiscal deficit, which includes debt-service costs, is projected at 4.2% of GDP for 2022/23. Including Eskom’s debt relief of R254bn, government debt is now projected to stabilise at a higher level of 73.6% of GDP in 2025/26, three years later than anticipated in the 2022 Medium Term Budget Policy Statement.

BLSA expected the country’s fiscal trajectory to weaken given the Eskom debt transfer and while SA’s high debt level is a concern, we believe this was necessary to help address the crippling effects of loadshedding.

Eskom

Addressing the energy crisis was always going to be central to this Budget and Eskom’s debt relief of R254bn was larger than expected, an acknowledgement of how critical it is to free up financing for Eskom to be able to operate more efficiently. Government will finance the arrangement through the R66bn baseline provision announced in the 2019 Budget, and R118bn in additional borrowings over the next three years.

The conditionality to the debt transfer is something the markets were watching closely and the first was that Eskom was required to prioritise capital expenditure in transmission and distribution during the debt-relief period.

BLSA believes that is a highly positive move towards increasing the country’s generation capacity as the lack of transmission capacity has resulted in few renewable energy plants than planned being approved in bid window 6 of the Renewable Energy IPP Procurement Programme.

The second condition was that Eskom needed to focus on maintenance of the existing generation fleet to improve availability of electricity. Again, BLSA believes National Treasury was right to prioritise this as it directly addresses loadshedding.

Another condition is that Eskom concessions all its coal-fired power stations after they have been resuscitated as recommended by an international consortium.

These moves provide the framework to resuscitate the country’s ailing energy infrastructure and inadequate generation capacity.

BLSA was also relieved to hear that concrete measures are finally being taken to address the debt owed to Eskom by municipalities, as well as non-payment by residents. While Treasury was “still working with Eskom to provide a solution to this problem,” the minister said Eskom would provide incentivised relief to municipalities whose debt is unaffordable. However, the relief would come with conditions, including the installation of prepaid meters, to correct the underlying behaviour of non-payment and operational practices in these municipalities.

Energy fiscal support package

The tax relief package announced to stimulate uptake of off-grid solutions was greater than anticipated, which is highly welcome. The minister said that from 1 March 2023, businesses would be able to reduce their taxable income by 125% of the cost of an investment in renewables, with no thresholds on the size of the projects that qualify, and the incentive would be available for two years.

For individuals, the tax incentive for rooftop solar installations would be 25%, which would take the form of a rebate, up to a maximum of R15,000. BLSA would have liked to have seen this incentive extended to battery systems such as invertors as the majority of the country will still not be able to afford solar solutions despite the tax benefit.

Through the adapted Bounce Back Loan Guarantee Scheme, government would also guarantee solar-related loans for small and medium enterprises on a 20% first-loss basis. National Treasury will launch the Energy Bounce Back Scheme in April 2023.

Overall though, BLSA believes Minister Godongwana has delivered on the most important aspects designed to address the energy crisis, noting also that through the Just Energy Transition Investment Plan, the country would also make significant investments into the economy over the next five years.

Taxation

With tax revenue collections for 2022/23 expected at R1.69tn, which exceeds the 2022 MTBPS estimate by R10.3bn, there were no major tax changes in this budget. However, the personal income tax brackets would be fully adjusted for inflation, which will increase the tax-free threshold from R91,250 to R95,750.

This is encouraging and we hope that the measures taken today to stabilise the energy market, which will provide the foundation for the economy to start growing at a far healthier rate, will contribute to potentially lowering the country’s high corporate and personal income tax rates over the longer term.

An important move, however, was taken to ease the impact of the electricity crisis on food prices. For this, the refund on the Road Accident Fund levy for diesel used in the manufacturing process, such as for generators, would be extended to manufacturers of foodstuffs.

Pensions

BLSA is disappointed that details of the “two-pot” system were not disclosed in the budget but the minister promised that government would publish the revised draft legislation shortly, which would be implemented from 1 March 2024. This would include details on the amount that could be immediately available while any withdrawals from the accessible “savings pot” would be taxed as income in the year of withdrawal.

Expenditure

Noting that more than 60% of non-interest expenditure goes to the social wage, Minister Godongwana said Treasury was increasing allocations to key frontline departments above existing baselines, “moving towards a change in the composition of spending from consumption to investment, maintaining a large social security safety net, while striving for sustainable levels of debt”. That is critical to developing a healthy, growing economy. It will be difficult to get the balance right, particularly given the wide need for government welfare support while the fiscus is so strained. But the need for investment spending is critical to enable the economy to grow and create jobs.

The minister also announced increases to various social grants. Spending on social grants will rise from R233bn in 2022/23 to R248.4bn in 2025/26, with the Covid-19 social relief of distress grant extended until 31 March 2024.

SAA and the SAPO

R1bn is allocated to SAA to assist the carrier with the business rescue process while the SA Post Office is allocated R2.4bn. The allocations for these SOEs will be accompanied by strict conditions to ensure sustainability, accountability and transparency. ‘If the conditions are not met, the money will not flow,” the minister said.

BLSA despairs at the allocation to SAA as it adds to the billions wasted in trying to save the entity – which is not important to the wider economy – before it went into business rescue.

Public sector wage bill

This Budget provides for the carry-through costs of the 2022/23 wage increase. In addition, it includes pay progression, a housing allowance, and other benefits for civil servants. The Budget also provides additional funding for safety and security, education and health. In health, the funds are to hire new staff, address shortfalls in compensation budgets, and retain additional health workers appointed during the pandemic, as well as to clear the backlog in health services.

In terms of the public sector wage negotiations that have begun, Minister Godongwana emphasised the importance of striking a balance between fair pay, fiscal sustainability and the need for additional staff in frontline services. He warned that an unbudgeted wage settlement would require “very significant trade-offs in government spending because the wage bill is a significant cost driver” and noted that funds would have to be clawed back in other ways. “Mainly, this will mean restricting the ability of departments and entities to fill non-critical posts. It will also mean achieving cost-savings from major rationalisation of state entities and programmes.”

While the public sector wage negotiations are strictly a matter between government and the representatives of public servants, it is essential that whatever the outcome, both fiscal sustainability and service delivery must be core components thereof.

Disaster response

With severe rainfalls and flooding around the country this week causing extensive damage to livelihoods and infrastructure with more such events likely to occur due to climate change effects, BLSA fully supports the extra allocation for disaster response. R695m was budgeted for this financial year for immediate relief with a further R1bn to be available next year. Last year’s devastating floods in KwaZulu-Natal highlighted how inadequate state infrastructure and disaster response processes were and attention also needs to be paid to these areas. “Climate resilient infrastructure” will become increasingly important in the years ahead.

Crime and corruption

A total of R14bn was allocated to fight crime and corruption, up from R9.1bn last year. BLSA is particularly pleased with the additional R1.3bn for the National Prosecuting Authority to support the implementation of the recommendations of the State Capture Commission and the Financial Action Task Force; R265.3m to the Financial Intelligence Centre to tackle organised and financial crime and R100m to the Special Investigating Unit to initiate civil litigation in the special tribunal, flowing from proclamations linked to the recommendations of the State Capture Commission.

These units are instrumental in pursuing prosecution related to the state capture era and to tackle the organised crime syndicates prevalent in numerous business sectors. These are having a devastating effect in terms of destroying state infrastructure through sabotage and cable theft. BLSA therefore welcomes this necessary investment in countering criminality, which is among South Africa’s key challenges.