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South Africa's Fiscal affairs turn the corner

Finance Minister Enoch Godongwana probably cannot believe his luck. It is highly unlikely that a taxation revenue overrun of the magnitude of R182-billion will ever be repeated again, and this provided the Finance Minister with unparalleled leeway in presenting the 2022 Budget.

Despite the usual antics via protests and chanting from various minority groups prior to the budget speech, the atmosphere in the temporary parliamentary venue was visibly upbeat, clearly influenced by the abundance of good news – except for the traditional increase in so-called sin taxes.

South Africa is now in the fortuitous position to have halted the rise in the budget deficit/GDP ratio, namely from 5.7 per cent of GDP in the past fiscal year, to a projected 4.2 per cent of GDP by 2024/25.  

Furthermore, National Treasury expects to realise a primary fiscal surplus – where taxation revenue exceeds non-interest expenditure - within the next two fiscal years. This will represent an achievement that would have been regarded as preposterous two years ago.

South Africa’s public debt/GDP ratio compares favourably with many of its peers and key trading partners and is projected to stabilise at 75.1 per cent by 2024/25 – a full three percentage points lower than when the Medium-Term Budget Policy Statement was tabled in October 2021.

The country’s fiscal metrics have improved dramatically since 2020 and it seems to have escaped the hangover effect of the pandemic, which continues to plague a number of high-income countries and developing economies alike.

Small business support

The hand of Pres. Ramaphosa’s inner circle was evident in a number of specific measures announced in the budget, which can be classified as the most business-friendly of the democratic era, dovetailing neatly into the State of the Nation Address (SONA) delivered two weeks earlier.

By lowering the corporate tax rate and announcing a sweeping overhaul of South Africa’s state-owned enterprises (SoEs), National Treasury has provided its full support of Pres. Ramaphosa’s intention to involve the maximum possible participation of the private sector in the country’s future development strategy.

Proof of the new emphasis on a partnership approach between government and the private sector is also evident in the announcement of a so-called “business bounce-back” scheme that will be launched in March.

According to National Treasury, it will consist of small business loan guarantees of R15 billion to be provided through participating banks and development finance institutions. Government will underwrite the first 20% of loan losses. The eligibility criteria, including the requirement for collateral, has been relaxed. A second element of the scheme, to be introduced as early as April this year, is the introduction of a business equity-linked loan guarantee support mechanism.

Energy transition on track

The budget has re-affirmed government’s commitments under the UN Climate Change Conference (COP26). Late last year, a number of European Union member states and the United States decided to partner with South Africa in its efforts to become less dependent on coal power and move towards green energy sources. In line with these commitments, the carbon tax rate will be progressively increased every year to reach $20 per tonne.

Green funding valued at around R130 billion over the next three years will be provided by the COP26 partners for the establishment of renewable energy sources, repurposing coal power stations and investing in new sustainable energy sectors, including green hydrogen.

It is no surprise that Mr Godongwana is feeling “more relaxed” (his own words) about the state of the country’s fiscal affairs than he did when he took the position as finance minister in August 2021, given the relentless increase in South Africa’s public debt over the past decade.

The budget did caution against a number of perceived risks to the short-term fiscal outlook, including a slowdown of global and domestic economic growth, pressure from the public service wage bill and requests for financial support from state‐owned enterprises.

Despite these ever-present threats to fiscal stability, however, a combination of rising revenues and expenditure restraint (in selected areas) has made it possible to turn the fiscal corner, whilst continuing to provide financial relief to unemployed citizens.

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