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National Budget: We cannot afford to be despondent now

Budget must aim to improve momentum of economic recovery

JOHANNESBURG, South Africa, 03 February 2022 – The 2022/23 National Budget takes place at a time when South Africa, and indeed the world, is emerging from two years of being battered by a pandemic, which has left the country reeling with low growth and high unemployment.

The International Monetary Fund (IMF) now speaks of disrupted global growth as a key feature of the year ahead. The fund has revised global growth downwards by 0,5 percentage points to 4,4% this year. At the same time, the IMF said that South Africa’s economy is expected to grow by 1.9% in 2022, compared with last October’s prediction of 2.2%.

The downward revision is caused by disruption to global supply chains due to Omicron, rising inflation in both advanced and developing economies leading to rising interest rates, record debt levels in parts of the world, and heightened policy uncertainty.

This state of heightened uncertainty should not lead us to inertia and policy paralysis. We have to face the year and decade ahead with determination, decisiveness and a sense of optimism. We cannot afford to be despondent.

The budget thus needs to respond to several critical issues to foster this sense of confidence.

The economic growth conundrum

Following the Global Financial Crisis in 2008/2009, South Africa’s economic growth never truly recovered.  Even as other middle income emerging market economies restored their growth rates to pre-recession levels, South Africa went on to record the worst decade on record for growth, according to the South African Reserve Bank Quarterly Bulletin, released in March 2021.

The government’s economic management performance for the decade ahead will be judged by how quickly we can get the growth rate to pre-COVID levels and then improve to pre-recession levels. This year’s National Budget needs to spell out the first steps to changing the growth trajectory.

Government’s economic reform programme is characterised by lengthy lead times between an idea being formulated and it being implemented. The latest setback is the court action by telecommunications companies over the auctioning of the spectrum. Government should not allow this to halt the overall momentum of reforms and should move on areas such as third party access to rail, announced in the Economy Reconstruction and Recovery Plan in October 2020, to help lower the cost of logistics.

Infrastructure spending 

Infrastructure spending is a critical pillar of economic recovery. The government needs to decide if it is worth borrowing to fund infrastructure spending to boost economic growth. This will be a high risk move if the borrowed funds are not used as intended or the anticipated growth does not materialise.

How the tax burden will be shared

One of the most critical questions to be answered in this budget is how the tax burden will be shared between individuals and corporates. This is because, over the past year, the idea of a Universal Basic Income Grant (BIG) has gained momentum while the National Health Insurance (NHI) remains an aspiration. Both these items may require tax increases to be financed.

In last year’s budget, individual taxpayers got relief of R2,2 billion through rebates and bracket adjustments. There is an even stronger case for more tax relief to help consumers cope with rising food and fuel costs, rising interest rates, and the devastating effects of the COVID-19 pandemic/outbreak on household finances.

At last year’s budget, it was announced that the corporate income tax rate will be reduced to 27% with effect from years of assessment commencing on or after 1 April this year. The government cannot afford to reverse this undertaking.

So, if the government needs to raise taxes in order to fund a BIG or NHI will they hurt consumers through personal income tax or value-added tax increases? Or should the burden fall to corporates or high net-worth individuals? Raising taxes may have a negative effect on the economy.

The focus should rather be on widening the tax base while lowering tax rates, a process that is already under way – with the reduction of the corporate income tax rate, accompanied by a reduction of some tax allowances such as deduction of certain expenditures and utilisation of assessed losses.

Ultimately, there is no substitute for growing the economy. A larger economy – and more people with jobs – will yield more tax revenue and assist in reducing unemployment. By contrast, imposing an even heavier burden on the existing tax base would damage the economy and therefore also tax collections in the long term.

Special focus on SMMEs

One of the most visible signs of economic devastation brought by COVID-19 has been the closure of many small, medium and micro enterprises (SMMEs). The government needs to put in place tax incentives and other measures to help stimulate the revival and growth of SMMEs as a critical engine for growth and job creation.

Government needs to focus on re-building the SMME sector as an important backbone of the economy for growth which will lead to employment where people live. Focus must be given to areas such as secondary manufacturing, agro-processing and mineral beneficiation, technology and artisanship with a feeder from Further Education and Training colleges. The growth of SMMEs should be highlighted as having a primary role in the overall growth agenda for South Africa. 

SOE reform has become more critical

Last year, the IMF in its Article IV report said that the South African government should take a full inventory of state-owned enterprises (SOEs) and divest or liquidate those that are no longer relevant.

According to IMF staff, there has been little progress in the government's implementation of structural reforms at SOEs, leaving continued weaknesses. "Structural rigidities are depressing private investment and hindering inclusive growth and job creation. These rigidities need to be tackled immediately to increase the economy's productivity and competitiveness and reduce poverty and inequality“,  according to the IMF. There seems to be inertia in the process of reviewing the SOE portfolio and deciding which ones to keep and which ones to merge, close down or privatise. The Finance Minister must look beyond financial support for the SOEs and include managerial and governance capacity as well as competency to deliver on the mandates of these entities. 

Financing the Green Transition

Last year at COP26, South Africa secured R130 billion in soft loans to move away from coal. But this is not the full amount required. In this year’s Budget Speech, the Finance Minister should spell out how these funds are to be deployed and how the government will raise the balance of the required funds to finance the Just Transition without stifling growth. The use of the carbon tax and other instruments to fund and promote a clean and green energy future will be critical.  

Healthcare: spending reaching inflection point between short- and long-term priorities

The COVID-19 outbreak has shown the need for a robust public health system to cope with health crises. At the same time, the COVID-19 response has taken away spending from other critical parts of healthcare spending, including HIV and TB.

Beyond 2022, health challenges are expected to begin to emerge, not only directly from the COVID-19 pandemic, but as an indirect result of all the socio-economic fallout the pandemic caused. Government will need to be aware of early indicators in the short term and to ensure that these can be addressed or risk compromising the healthcare system in the long term.

In addition, the government needs innovative ways to allocate more resources to the implementation of NHI while restoring funding to other critical programmes. That a COVID vaccine trial is currently being carried out on HIV-positive individuals is an encouraging sign that other epidemics, such as HIV/AIDS, continue to receive attention.

The establishment of the NantSA vaccine manufacturing facility recently launched in the Western Cape by President Cyril Ramaphosa is also a positive development for the continent, the budget still needs to allocate adequate resources to combat the immediate needs of South Africans beyond the COVID crisis.   It is crucial that focus be expanded to other health-related burdens such as TB, non-communicable diseases such as diabetes, and socio-economic factors like teenage pregnancy.

Raising optimism

As the budget takes place against a backdrop of fragile and cautious global recovery, its main aim should be to give fresh impetus to the country’s economic recovery, as well as provide growth and development plans. 

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