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Finance minister has BIG policy decisions to make

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The Eskom and cost-of-living crises facing South Africa mean Finance Minister Enoch Godongwana has tough choices to make when he delivers his 2022 Medium-Term Budget Policy Statement next Wednesday (26 October).

Record levels of load shedding impede growth prospects and there is talk that the minister will announce a R200 billion debt reduction in order for Eskom to return to the open market for financing.

Isaah Mhlanga, chief economist at Alexforbes, says they also expect details on the structure, quantum and terms of the $8.5 billion (R155.6 billion)  Just Transition financing commitments to mitigate climate change.

Read: Cabinet backs energy plan in key step for R154bn deal

“Key will be how much is disbursed, the terms attached to them and whether this increases the state’s debt levels or not. A lot remains unclear, and details will clarify the assessment of the fiscal position,” Mhlanga said in a briefing on expectations for next week’s mini budget.

The BIG question

There is also an expectation that the current Social Relief of Distress Grant will be extended until March 2024, but that no further budget allocations will be made to indicate that the support remains temporary.

“If we look at the global cost-of-living crisis it is a short-term problem and therefore solutions must be temporary and well targeted,” says Mhlanga.

The future of the social relief grant remains a “political hot” debate, he adds, and warns that turning it into a permanent universal Basic Income Grant (BIG) will bring SA to a fiscal crisis within five years.

Isaah Mhlanga, Alexforbes, load shedding, Eskom, MTBPS, mini budget

Isaah Mhlanga, chief economist at Alexforbes. Image: Moneyweb

“SA cannot afford a welfare state. We have a 2% growth economy.”

Several scenarios have already been sketched to demonstrate the massive impact a BIG will have if it becomes permanent. One such scenario is that tax will have to be increased by three percentage points if the grant is to be funded through tax.

Pragmatic vs populistic

Citadel chief economist Maarten Ackerman says in a statement that Godongwana will be closely watched to see if he prioritises pragmatic policies that stimulate real business growth and job creation – or bows to populist pressures that prioritise social spending that will have no lasting positive impact on the country.

“South Africa is still stuck in a balancing act between weak growth and populist needs that will continue indefinitely, such as the BIG.”

Read:
What to expect from the medium-term budget policy statement
Basic Income Grant: What is the debate about?
Social grants offer cash, but they aren’t a magic bullet

Mhlanga says poverty and inequality are longstanding economic and political problems, but there is universal acceptance that they threaten social stability.

However, he argues that these two problems have been bundled together with single solutions provided for both. Alexforbes is of the view that each one requires a different set of solutions.

Poverty is a first order problem and if that is solved, social stability issues are solved, even within a highly unequal society. Inequality is a second order problem. Government policy should first and foremost find solutions to address absolute poverty.

Mhlanga raises concerns about bad policy decisions and criticises the decision earlier this year that offered universal relief from the fuel levy when oil prices reached record-high levels.

“It benefitted largely people who have cars and not the poorest of the poor because public transport costs increased,” he says.

South Africa needs solutions that go beyond cash transfers. “We need better education and training, labour market reforms and a relook of our minimum wage laws.”

If poverty is the first order problem then it will make sense to lower the minimum wage to the upper-bound poverty line.

Revenue overruns

Taking a look at tax collections year-to-date Mhlanga says there has been a “significant recovery” in tax revenue. Personal income tax, value-added tax (Vat) and corporate income tax – the three main contributors to total tax revenue – performed better than  forecasted during the February 2022 Budget.

Tax collections from individuals grew by 7.6% year-to-date compared to the 6.1% forecast, Vat growth was marginally better at 12.9% (budget: 12.5%) and tax from company profits shot the lights out with 14.8% growth compared to an expected contraction of 15.8%.

Mining profits have been the saving grace for the last two years, says Mahlanga. This allowed the country to continue spending without derailing the fiscal position. SA was also able to reduce its debt level more quickly than anticipated.

Read:
South African economy likely in technical recession: Citi
Fiscal prudence has made SA more resilient, says Kganyago

Total tax revenue year to date amounts to R510 billion, compared to the forecast of R465 billion in February. National Treasury is just able to keep the lid on expenditure at R628 billion compared to the forecasted R621 billion.

Citadel’s Ackerman says how government will use – or misuse – the revenue overrun remains extremely important mainly because of the ballooning debt-to-GDP ratio.

“The deficit also poses a risk, so the fact that we are seeing slightly better numbers doesn’t mean the difficulties are behind us. If anything goes belly-up, we’ll be close to the fiscal cliff again that [former] finance minister Tito Mboweni warned us about,” he notes.

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