Finance Minister Enoch Godongwana’s maiden budget speech was generally seen as cautious, with a focus on debt stabilisation and social protection. While we believe there is moderate further upside to tax revenues and reasonable buffers built into the revenue assumptions and expenditure projections, the budget is pragmatic. There are potential upside risks to revenues, which could lead to earlier debt stabilisation at lower levels, but there are numerous downside risks, that could again delay much-needed consolidation. The commodity price cycle and financial positions at State Owned Enterprises are key factors over the medium-term expenditure framework.
Paying down debt
The budget used the significant cash overrun to fund a large part of the FY21/22 deficit and commits to further cash drawdowns to fund the FY22/23 deficit. At the same time, it uses the terms of trade boom to support the poor via a 12-month extension to the Special Relief of Distress Grant (as telegraphed in the State of the Nation Address), inflation-linked increases in the various grants, and a slight broadening of the welfare net. In addition, there is net tax relief via the lack of fiscal drag, and there will be no increase in the fuel and Road Accident Fund levies in light of the record domestic fuel prices. Godongwana followed through on Mboweni’s commitment to cut the corporate income tax rate by 1ppt, to 27%, although this is offset by other indirect corporate tax measures.
The budget does not allow for a basic income grant, as the finance minister rightly notes that a structural increase in spending would require a structural increase in revenues, i.e. a personal income tax or VAT rate hike. This is a notable risk to spending in the medium term, given socio-economic and political economy pressures.
The South African Revenue Service (SARS) rebuild is starting to pay off, with a R5bn upside revenue surprise attributed to efficiency gains.
Tough wage negotiations ahead
The budget attempts a tough stance on the wage bill, but in rolling over the cash gratuity and allowing for a 2.6% rise in the compensation line, Treasury acknowledges that wage negotiations will be tough when inflationary pressures – notably in food and transport – are mounting.
On balance, we think it was the correct strategy not to rely on multi-year commodity price revenue increases. However, ahead of today’s budget, analyst expectations had become increasingly optimistic. This led to conjecture that government could lower the size of its weekly bond auctions. However, we do not think this will transpire, at least not until there are further revenue gains and/or alternative funding sources. As such, the pre-Budget rally in the bond market has turned into a modest post-Budget sell-off.
We think the budget outcome is neutral for monetary policy in the shorter term, with the South African Reserve Bank (SARB) focused on inflation risks and global monetary policy dynamics.