South Africa cuts taxes and tightens debt targets in budget after revenue windfall

25 Feb 22

South Africa has presented a 2022 budget with lower taxes and more ambitious debt targets after high commodity prices led to higher-than-expected revenue - but analysts have warned against over-optimism.

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Cape Town

Cape Town, South Africa. Image © Shutterstock

The budget shows the deficit for 2021-22 will be about 5.7% of GDP – considerably smaller than the 7.8% projected as recently as November.

Revenue is expected to reach 1.6trn rand (£75.1bn), which is 182bn rand (£8.8bn) more than projected at last year’s budget, which finance minister Enoch Godongwana said was mainly thanks to high taxes from the mining sector.

The minister recognised high takings are “not a reflection of an improvement in the capacity of our economy” and thus should not be the basis for permanent increases in spending.

But in recognition of increasing fuel prices and the ongoing effects of Covid-19, Godongwana announced 5.2bn rand (£260m) of tax relief, saying “now is not the time to increase taxes and put the economy at risk”.

The income tax threshold will rise by 4.5%, in line with inflation, fuel levies will be frozen and employment tax relief will rise by 50%.

The minister said South Africa’s debt burden “remains a matter of serious concern”, with total government debt having reached 4.3trn rand (£210bn) and being projected to rise to 5.4trn rand (£270bn) in the medium term.

Servicing that debt costs the government 330bn rand (£16.2bn) annually, Godongwana said – more than spending on health, policing and basic education.

He said under his plans the government should reach a primary fiscal surplus (i.e. revenue exceeds non-interest spending) by 2023-24, and for the first time since 2015 the government is reducing the borrowing requirement because of the revenue windfall.

Rating agency Fitch raised the outlook on South Africa’s BB- rating in December from negative to stable, citing improved fiscal performance.

But analysts, in response to the budget, said if commodity prices fall “a contraction in revenue cannot be excluded”.

They said spending plans in the budget, including extending a large grant scheme for another year, mean the government will breach its spending ceiling in 2023-24 for the fourth year in a row – first in 2019-20 due to state-owned enterprise bailouts and then subsequently because of Covid-19.

Fitch also said it expects “some form of social grant” to be made permanent because of pressure from huge unemployment and income inequality, making future breaches likely.

“Although we anticipated the breach this year, it raises questions about the government’s ability to pursue fiscal consolidation if revenue forecasts disappoint or other fiscal risks materialise,” the analysts said in a note.

“A more durable resolution of South Africa’s fiscal challenges in a difficult socioeconomic context would require a substantial acceleration of economic growth.

“So far, government initiatives and progress on implementation has been insufficient to make this likely.”

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