Mid-term budget needs to address several grey areas – PwC

The transfer of Eskom’s debt to the country’s balance sheet, greylisting and the backlog in processing critical skills visas are three of six items on PwC’s list of key factors that it hopes will be addressed in the medium-term budget policy statement (MTBPS).

The mid-term budget is due to be tabled by Finance Minister Enoch Godongwana on Wednesday (26 October).

Read all our MTBPS coverage here.

In its South Africa Economic Outlook report for 2022, its 10th such report, PwC says the statement should also address a planned framework for a comprehensive social security system, management of the government wage bill and progress with the Infrastructure Fund pipeline.

Challenges

“The biggest challenges to accelerating South Africa’s economic and employment growth are electricity (load shedding), a lack of skilled workers, and low private sector investment levels. Without addressing these, economic prosperity will remain elusive,” notes PwC SA senior economist Christie Viljoen.

“The MTBPS has the opportunity to provide more clarity to South African businesses on what the government is doing to address these challenges which are weighing on business confidence and job growth.”

PwC says that while the transfer of Eskom’s R400 billion debt to the sovereign balance sheet would result in further deterioration in fiscal metrics, it could be the only choice available to improve the utility’s finances and the country’s economic prospects.

“Most consumers would probably prefer the debt transfer option over a 32.7% increase in electricity tariffs in 2023, as requested by Eskom from the National Energy Regulator of South Africa (Nersa),” reads the report.

Greylisting 

Regarding the October deadline set by the Financial Action Task Force (FATF)  for South Africa to address the shortcomings in legislation and legal machinery to prevent financial crimes, PwC says that if the country is greylisted the private sector will have to endure increased international transactional and compliance costs.

The report, which quotes Intellidex’s October report suggesting an 85% chance of South Africa being greylisted, says the MTBPS should provide an objective and frank evaluation of the progress made as well as the remaining shortcomings if the FATF is to be reassured.

Skilled visa backlog

It says the significant backlog in the processing of skilled visa applications must also be prioritised from a finance and human resource capacity perspective. It notes that since the processing of visa applications was centralised – at the Department of Home Affairs (DHA) office in Pretoria – administrative backlogs have led to months-long waiting lists for approval.

“While most foreign-owned firms in SA have a majority local representation among their staff, their operations are dependent on the presence of foreign nationals in key positions.”

The PwC says it expects Godongwana to allocate funding and technical capabilities to help the DHA resolve the backlog dilemma.

“If not, local and foreign businesses would be discouraged from attempting to source skilled foreign workers, with SA risking the offshoring of business activity and investment.”

Work, wages, pressure

Despite arguments for and against a permanent basic income grant, PwC says it believes the framework for a comprehensive social security net must be detailed as soon as possible, given the country’s socio-economic challenges.

“There are currently 12.3 million unemployed adults in the country with many looking at the state for solutions to their financial dilemmas,” it says.

The report further notes that the MTBPS needs to emphasise that government is not walking back on its pledge to reduce pressure exerted on the budget by its own remuneration costs.

This however comes after Statistics SA reported that basic salaries and wages earned in the community services sector increased by 2.9% year on year in the first quarter of 2022.

“This was below the national average of 3.8% year-on-year and lower than the consumer price inflation (CPI) rate that reached a 13-year high of 7.4% year-on-year in June, highlighting another year of civil servants experiencing a decline in buying power,” states the report.

Commenting on the imminent threat of industrial action in the public sector, the report notes that a government strike this year would be the first large-scale industrial action in the sector since 2010. It says the possible strike will test treasury’s resolve to reduce wage bill growth from an average of 7.3% per annum during the 2014/15-2019/20 period to 2.1% per annum over the medium term.

Infrastructure funding 

The report says a lack of public sector funding for infrastructure has resulted in South Africa falling behind its National Development Plan (NDP) goals and needing much greater private sector involvement to ensure infrastructure rollout.

“We estimate an additional R1.6 trillion in public sector infrastructure investment is required by 2030 to meet the NDP goals, over and above that forecast at present, for spending over the next eight years.”

It notes that while Godongwana noted in his budget 2022 speech that progress had been made with 10 of the 61 projects in the Infrastructure Fund pipeline, the MTBPS needs to provide an update on the rollout.

Revenue collections

The report says personal income tax data is confirming the beginning of a labour market recovery with collections seeing an 8.4% year on year increase in the first six months of 2022.

It notes the recording of a 4.5% year on year increase in gross earnings across the formal non-agricultural economy during the second quarter.

However, it says the rise in gross earnings was accompanied by an average CPI rate of 6.6% year on year, which points to a 2.1% year on year decline in the buying power of gross earnings during the second quarter of 2022.

“Apart from the cost-of-living challenges in the country, interest rates have increased by a cumulative 275 basis points over the past 12 months in response to rising consumer price inflation. This, in turn, has resulted in larger shares of household budgets going to debt repayments.”

On a more positive note, it says to date the 2022/23 year has seen corporate income tax collections increase by 14.7%, following an initially anticipated 15.2% year on year decline in February.

The report notes that due to the deterioration in the inflation environment, the country’s current nominal GDP growth forecast for 2022 of 7.4% is much higher than the 3% anticipated by treasury in February.

It further notes that while treasury forecast a 6% fiscal shortfall of GDP in February, it has calculated a narrower projection of 5.5%.

It says that while the 2022 budget planned for a 14.6% increase in value-added tax (vat) to R440 billion, collections were only 11.9% higher year on year in the first six months of 2022/23.

Public debt

PwC says public debt is not expected to peak soon due to large fiscal budget deficits, but it expects public debt to increase to 76.4% of GDP by 2025.

“Personal and corporate income tax collections have outperformed expectations in the 2022/2023 fiscal year so far,” notes PwC SA chief economist Lullu Krugel.

“We also expect the fiscal deficit to slowly narrow over the medium term. However, it will take many years to reach a level below 3% of GDP, which is viewed as sustainable from a financing perspective.

As such, public debt, as [a] percentage of GDP, is forecast to continue rising in the years ahead,” Krugel adds.

Nondumiso Lehutso is a Moneyweb intern.