A ‘realistic’ mid-term budget delivered under severe constraints

Business Leadership South Africa (BLSA) welcomes the 2023 Medium-Term Budget Policy Statement (MTBPS) which delivered the commitment to fiscal discipline that is vital to maintaining business confidence.

As we expected, revenue has fallen short of the amounts initially budgeted for this year and as a result the budget deficit will be 4.9% of GDP, considerably worse than the previous estimate of 4%.

Read:
MTBPS in a nutshell
Government misses revenue target by R57bn
The winners and losers in SA’s budget

However, Finance Minister Enoch Godongwana committed to a number of important targets, including fiscal consolidation, reduced expenditure, no significant tax increases, and reorganisation of government functions.

Spending was revised down by R21 billion for the current financial year with further reductions of R64 billion in 2024/25 and R69 billion in 2025/26 proposed. This is highly positive for government’s credibility as a custodian of the public purse, showing the discipline needed to manage expenditure in the face of far higher debt costs and very little room for tax increases.

We commend the minister for the realism shown in the speech.

He outlined the numerous challenges and acknowledged the risks.

Among those is the weak outlook for the global economy, which is not supportive for SA’s growth prospects.

Read: Economic growth to weaken to 0.8% in 2023

Also, in the face of a strong campaign for him to spend more and allow debt to rise, he held the line firmly and highlighted the need for fiscal consolidation.

But lower revenue performance (across future years too), higher wage bill costs and higher projected debt-service costs saw the budget deficit increasing by R54.7 billion compared with the 2023 Budget estimates.

Business under pressure

The lower revenue performance was driven by a sharp fall in corporate income tax, particularly from the mining sector, although personal income tax collection was better than forecast.

The fall in corporate income tax shows the pressure the  business sector has been under, with profits falling.

While government sometimes thinks business is a golden goose that can keep on giving, the reality is quite different.

What we need are policy interventions that support business growth, not taxes that do the opposite.

We welcome the minister’s commitment to measures to stabilise public finances and reform the economy to generate higher growth. He recognises that the most effective way of funding government is through an efficient tax administration and by broadening the tax base. That requires improving the efficiency of tax collection but also measures to grow the economy.

The strategy outlined in the MTBPS to boost growth is primarily through reforms – funding for capital projects remained the fastest-growing item and government is introducing a new mechanism for improving the pace of delivery of capital projects.

BLSA welcomes this commitment. Capital investment in infrastructure is key to expanding the capacity of the economy and delivering growth.

I applaud the minister for maintaining the commitment to investing in the economy despite the constraints on the budget. This provides the positive momentum needed to catalyse business investment. It is very positive there has been huge rotation of spending into strategic areas but there is some degree of risk because spending cuts will be needed elsewhere.

Public-private partnerships

The new Infrastructure Finance and Implementation Support Agency being created will be important to this goal and BLSA is heartened by Godongwana’s commitment to improving the efficiency of infrastructure delivery with private sector participation.

Partnership with the private sector is critical to growth. The support agency can be key in facilitating public and private sectors to work together to deliver infrastructure investment.

This would be really positive and I’m excited to work with the new agency to make that a reality.

We also welcome the minister’s intention to “facilitate a quantum shift in the quantity and quality of delivery by mobilising private sector financing and technical expertise at scale”, as he put it in his speech.

BLSA has been mobilising  technical expertise through mechanisms like the Resource Mobilisation Fund and Tamdev [Technical Assistance Mentorship Development programme] and we look forward to working with the minister to scale such mobilisation efforts further. Through partnerships, the private sector stands ready to invest in infrastructure at scale.

The minister was however realistic about the challenges facing infrastructure development and reasserted his determination to address these.

These include the lack of a credible pipeline of public projects that can attract funding, lack of sustainable financing arrangements to crowd in private finances, and poor contract and project management to manage cost and schedule overruns.

As part of the resolution of these challenges, he said government is amending Treasury Regulations and key elements of municipal legislation in line with the recommendations of the completed review of the Public-Private Partnerships (PPP) framework.

BLSA has long called for reform of the PPP framework to ease  the speed with which projects can be implemented. We welcome the commitment  to implement the changes by the next budget.

Eskom and municipal debt relief

The update on the debt-relief arrangement for Eskom outlined in the 2023 Budget included support measures to relieve municipalities of debt to Eskom.

Qualifying  municipalities will be able to write off debt to Eskom up to 31 March 2023 over a three-year period, in equal annual tranches. To qualify for the debt relief, municipalities would have to meet conditions including strict credit controls, enhanced revenue collection and up-to-date payments to Eskom.

BLSA emphasises that those conditions have to be enforced, otherwise the debt will simply build up again and the taxpayer will have to again pay the cost for dysfunctional municipalities.

Godongwana said that by October 2023, 67 applications had been submitted, totalling R56.8 billion, or 97% of total municipal debt owed to Eskom at end-March 2023.

Ultimately BLSA wants to see a sustainable financial solution for Eskom that enables it to resume funding its own capital expenditure programme. The municipal debt programme can assist in one element of that, though the full solution needs comprehensive relief of Eskom’s existing debt.

We had hoped for more detail on how this may be achieved.

He gave little away on the results of National Treasury’s review of Eskom’s coal-fired power stations, saying only that it was complete and effective implementation of the recommendations will help transform the electricity sector.

Read: Good news about SA’s electricity crisis

Logistics

Acknowledging that rail underperformance is estimated to have cost up to 5% of GDP in 2022, with losses in the region of R50 billion in the minerals sector alone, Godongwana had nothing new to announce, despite the scale of the challenges facing the logistics sector.

In a pre-budget briefing, he rejected Transnet’s request for a bailout of R100 billion and in his MTBPS speech he emphasised that, recognising the seriousness of the situation, National Treasury was working with Transnet and the Department of Public Enterprises to ensure that Transnet could meet its immediate debt obligations.

Read: No bailouts (yet) for Transnet

He said broader reforms of the logistics sector would be guided by the Freight Logistics Roadmap.

BLSA fully endorses this approach. The roadmap sets out a clear vision for reforming logistics with appropriate roles for public and private sectors.

We are heartened by the minister’s commitment to the road map, which needs urgent implementation.

We also welcome the minister’s moves to address extreme weather events caused by climate change, with a resource pool created to specifically respond to future disasters. He said R372 million had been added to the municipal disaster response grant and R1.2 billion added to the municipal disaster recovery grant, to cover the repair and rehabilitation of infrastructure damaged by flooding in February and March 2023.

Grey list

Discussing SA’s greylisting, the minister said 15 of the 20 technical deficiencies identified by the Financial Action Task Force (FATF) have been addressed and good progress has been made on 17 of the 22 effectiveness action items, including two that are now deemed to be largely addressed.

We welcome the progress that has been made, though there remains considerable work to be done, particularly in ensuring the changes are effective.

BLSA is supporting these efforts through our wider support of the criminal justice system through our memorandum of understanding with the National Prosecuting Authority and the work by Business Against Crime to support the police and other institutions across the criminal justice system.

Ultimately, South Africa needs to demonstrate to FATF that it can police and prosecute serious financial crime before we will escape the grey list. The minister said he expects to have met FATF requirements by early 2025, which would enable removal from the list at the FATF plenary in June 2025.

Reaction

I expect  there will be criticism of this MTBPS for being ‘an austerity budget’. But it delivers the fiscal discipline that is critical to business confidence.

With business faith in government as a custodian of the nation’s finances, companies will invest. That investment is key to drive growth which will enable the revenue to support government spending.

Wednesday’s MTBPS was a credible step toward delivering the growth that will support sustainable public spending allied by the reforms announced.

We fully support the economic reforms, particularly in the key network industries of transport and energy, designed to improve the efficiency of our economy and, under the right conditions, the private sector will be willing investors in developing infrastructure and investing in other areas that will contribute to economic growth – which is still the best means of addressing the country’s triple challenge of poverty, inequality and unemployment.

Replay the livestream: Godongwana tables his 2023 MTBPS

Busi Mavuso is CEO of Business Leadership South Africa.