2023 Budget – Navigating an uneven economic recovery

23 Feb 2023

Introduction

Delivering the 2023 Budget speech in parliament, the finance minister, Enoch Godongwana, highlighted that the Budget was being tabled in a difficult domestic and global economic environment.

The minister pointed out that the difficult environment was being navigated with policies that support faster growth and address fiscal risks.

The pursuit of higher growth is based on three pillars:

• ensuring a stable macroeconomic framework to create a conducive environment for savings, investment and growth;
• implementing growth-enhancing reforms in key sectors including energy and transport; and
• strengthening the capacity of the state to deliver quality public services, invest in infrastructure and fight crime and corruption.

According to the Budget Review, the 2023 Budget marks a significant step forward in re‐establishing sustainable public finances.

“This year, government will achieve a main budget primary surplus – meaning that revenue exceeds non‐interest spending – for the first time since 2008/09.”

Economic outlook

Global outlook

Global growth estimates for 2023 have been revised lower since the 2022 Budget.

The International Monetary Fund projects global growth to slow from an estimated 3.4 per cent in 2022 to 2.9 per cent in 2023.

According to national treasury, global economic risks remain high, including those related to the ongoing war in Ukraine, and could impede growth.

Treasury points out that the reopening of the Chinese economy, however, may “offer some reprieve by supporting a stronger rebound in global trade and demand”.

Domestic outlook

South Africa is expected to register better-than-expected GDP growth of 2.5 per cent in 2022, mainly due to strong agriculture and services sector growth in the third quarter.

However, GDP growth is expected to decline over the medium term, averaging 1.4 per cent, as a result of persistent power cuts, deteriorating rail and port infrastructure, and a weaker global outlook.

According to treasury, government is taking urgent measures to reduce load-shedding in the short term and transform the sector through market reforms to achieve long-term energy security.

Reforms to improve performance in the transport sector, in particular freight rail, are also underway.

Fiscal policy

Government remains focused on stabilising public debt and ensuring sustainable public finances.

Government debt is projected to stabilise at 73.6 per cent of GDP in 2025/26.

The gross debt stock is projected to increase from R4.73 trillion in 2022/23 to R5.84 trillion in 2025/26.

Debt service costs as a share of revenue are expected to peak in the same year.

Debt-service costs are projected to average R366.8 billion annually over the medium term, reaching R397.1 billion in 2025/26.

Revenue performance and projections exceed 2022 Budget estimates.

Funds will be used to strengthen the social wage and infrastructure investment, narrow the budget deficit, and address fiscal and economic risks.

Government will achieve a main Budget primary surplus in 2022/23.

Main Budget non-interest expenditure will grow slightly above consumer price index inflation in the outer two years of the medium-term expenditure framework period.

The consolidated Budget deficit is expected to narrow from 4 per cent of GDP in 2023/24 to 3.2 per cent of GDP in 2025/26.

Eskom debt relief amounting to R254 billion will enable the entity to focus on necessary investment and maintenance as part of broader energy sector reforms.

However, this requires a “step change in public debt”.

Revenue trends and tax proposals

A strong revenue performance in 2022/23 was driven by increased commodity prices, and a continued recovery from the Covid-19 pandemic among manufacturing and financial firms.

Tax revenue collections for 2022/23 are expected to total R1.69 trillion.

This exceeds the 2022 Budget estimate by R93.7 billion, and the 2022 MTBPS estimate by R10.3 billion.

Over the next three years, revenue is expected to grow by R351 billion, reaching R2.04 trillion in 2025/26.

The tax-to-GDP ratio increases from 25.4 per cent to 25.7 per cent over this period.

The 2023 Budget provides tax relief amounting to R13 billion in 2023/24.

The personal income tax brackets will be fully adjusted for inflation increasing the tax-free threshold from R91 250 to R95 750.

Medical tax credits will also be increased by inflation, to R364 per month for the first two members, and to R246 per month for additional members.

The retirement tax tables for lump sums withdrawn before retirement, and for lump sums withdrawn at retirement, will be adjusted upwards by 10 per cent meaning that the tax-free amount that can be withdrawn at retirement increases to R550 000.

The brackets of the transfer duty table will also be increased by 10 per cent, allowing properties below R1.1 million to avoid any transfer duty payments.

The refund on the Road Accident Fund levy for diesel used in the manufacturing process, such as for generators, will be extended to manufacturers of foodstuffs to ease the impact of the electricity crisis on food prices. This takes effect from 1 April 2023 for two years.

R9 billion is also provided to encourage households and businesses to invest in renewable energy, supporting the clean energy transition and addressing the electricity crisis.

According to the finance minister, two tax measures to encourage businesses and individuals to invest in renewable energy and increase electricity generation will be introduced.

From 1 March 2023, businesses will be able to reduce their taxable income by 125 per cent of the cost of an investment in renewables.

“There will be no thresholds on the size of the projects that qualify, and the incentive will be available for two years to stimulate investment in the short term”, he said.

A new tax incentive for individuals to install rooftop solar panels to reduce pressure on the grid and help ease loadshedding will also be introduced.

According to the minister, individuals who “install rooftop solar panels from 1 March 2023 will be able to claim a rebate of 25 per cent of the cost of the panels, up to a maximum of R15 000”.

The incentive will be available for one year.

Changes to the Bounce Back Loan Guarantee Scheme are also proposed to incentivize renewable energy, rooftop solar, and address energy-related constraints experienced by small and medium enterprises.

“Government will guarantee solar-related loans for small and medium enterprises on a 20 per cent first-loss basis.”

The Energy Bounce Back Scheme will be launched in April 2023.

Government proposes an increase in the excise duties on alcohol and tobacco of 4.9 per cent, in line with expected inflation.

This means that the duty on:

• a 340 millilitre can of beer increases by 10 cents;
• a 750 millilitre bottle of wine goes up by 18 cents;
• a 750 millilitre bottle of spirits will increase by R3.90;
• a 23 gram cigar by R5.47; and
• on a pack of 20 cigarettes, the duty rises 98 cents.

Consolidated spending plans

Main Budget non-interest spending increases by a net R128.4 billion over the medium term expenditure framework period compared with the 2022 Budget.

Additional funding is allocated mainly for the carry-through costs of the 2022/23 public service wage increase, to improve investment in infrastructure and to support safety and security, education and health services.

Consolidated government spending will increase from R2.17 trillion in 2022/23 to R2.48 trillion in 2025/26, growing at an average annual rate of 4.5 per cent.

The social wage, which includes allocations for community development, employment programmes, health, education and social protection, will constitute an average of 60.2 per cent of total non-interest spending over the next three years.

R30 billion will be used for inflation-linked increases for social grants:

• Old age and disability grants increase by R90 on 1 April 2023 and a further R10 on 1 October 2023 resulting in a total increase to R2090;
• Child support grant rises from R480 to R510 on 1 October 2023, while the foster care grant increases from R1070 to R1130 over the same period;
• R23 billion and R22 billion will be allocated to health and basic education respectively, to cover the shortfall in compensation budgets and to improve services; and
• R8 billion is allocated for basic services through the local government equitable share.

R14 billion is also allocated over the medium term to fight crime and corruption.

R1 billion is allocated to South African Airways to assist the airline with the business rescue process while the South African Post Office gets R2.4 billion.

R36 billion is allocated to fund the extension of the COVID-19 social relief of distress grant until 31 March 2024.

Division of revenue and spending by provinces and municipalities

Over the next three years, provinces and municipalities will focus on improving service delivery.

Over the medium‐term expenditure framework period, after providing for debt‐service costs, the contingency reserve and provisional allocations, 48.6 per cent of nationally raised funds are allocated to national government, 41.5 per cent to provincial government and 10 per cent to local government.

Direct transfers to provinces and municipalities over the medium term increase by R92.7 billion and R14.3 billion respectively helping to address various spending pressures.

According to treasury, government is strengthening the regulatory environment and support to subnational government to help address challenges in those spheres.

Government debt and contingent liabilities

The gross borrowing requirement has declined from R484.5 billion at the time of the 2022 Budget to R387.9 billion, largely as a result of higher-than-anticipated revenue collection.

Due to elevated redemptions and Eskom debt relief, the borrowing requirement will reach R555 billion in 2025/26.

Gross loan debt will grow to R5.84 trillion in the outer year of the medium-term expenditure framework period.

Government’s R350 billion guarantee framework agreement issued to Eskom expires on 31 March 2023.

Gross loan debt is projected to stabilise at 73.6 per cent of GDP in 2025/26, and to decline thereafter.

Financial position of public-sector institutions

The preliminary framework for managing bailouts to state-owned companies to reduce fiscal risks and promote long-overdue reforms will be published in March 2023 for consultation and will thereafter be submitted to cabinet.

A major debt-relief arrangement for Eskom will relieve pressure on the utility’s balance sheet and maintenance programme.

A total debt-relief arrangement for Eskom of R254 billion is proposed consisting of two components.

One is R184 billion representing Eskom’s full debt settlement requirement in three tranches over the medium term while the second is a direct take-over of up to R70 billion of Eskom’s loan portfolio in 2025/26.

Treasury points out that, due to the structure of the debt relief, Eskom will not need further borrowing during the relief period.

Government will finance the arrangement via the R66 billion baseline provision announced in the 2019 Budget, and R118 billion in additional borrowings over the next three years.

Treasury also emphasised that, over the medium term, the “net overall position of the social security funds is expected to improve in line with stronger outcomes in each fund”.

The Development Bank of Southern Africa and the Industrial Development Corporation showed resilience during the economic recovery from COVID-19.

The Land Bank’s financial position has improved, but it remains in default.

On the horizon

A bill to set up an infrastructure agency to leverage the assets in the water sector for increased investment in water resource infrastructure will be tabled in parliament in 2023.

National treasury plans to publish details for accessing Eskom debt relief by municipalities in a circular in March 2023. Implementation will start from 1 April.

Government intends to publish revised draft legislation on the ‘two-pot’ retirement system. This will include details on the amount that could be immediately available when the system is implemented from 1 March 2024. Any withdrawals from the accessible “savings pot” would be taxed as income in the year of withdrawal.

National treasury, in the upcoming financial year, will work with the presidency on concrete proposals to achieve savings by rationalising or closing public entities.

Recommendations will be made to the president and cabinet and should form part of the next Budget.

The future of the Covid-19 social relief of distress grant, currently funded until 31 March 2024, remains under discussion.

“Government will make a decision in line with its commitment to sustainable public finances. Any permanent increase in expenditure, such as a new social grant, will need to be matched by permanent revenue increases or spending reductions elsewhere.”

The public service and administration department, working with national treasury and other national departments, is conducting a review across government to propose a single remuneration framework aligned with the principles of fair, equitable and sustainable remuneration in the public sector, excluding state-owned companies.

Government will, in 2023, publish a draft position on the implementation of Pillar Two on tax rules related to digitalisation and base erosion for public comment. Draft legislation will be prepared for inclusion in the 2024 Taxation Laws Amendment Bill.

The research and development tax incentive will be extended for 10 years from 1 January 2024.

In terms of the effect of remote work on the personal income tax regime, a discussion document will be released this year to outline workplace practices and policies, changes in the current environment and how different workplaces are affected by home office and travel allowance policies.

See also:

• Regulatory compliance critical for government spending
• Proposed new energy initiatives for South Africa – Is this the answer to loathsome loadshedding?
• Groundbreaking report shines light on the rule of law across Africa
• Overview of the main findings and recommendations of Part 1 of the Report by the State Capture Commission

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)