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A market-pleasing MTBPS 2022

Minister Godongwana’s fiscal prudence likely to reassure investors
Ndivhuho Netshitenzhe

Ndivhuho Netshitenzhe

STANLIB Economist

Sylvester Kobo

Sylvester Kobo

STANLIB Deputy Head of Fixed Income

A sterling performance by the South African Revenue Service, which has resulted in a significant tax collection overrun so far in 2022/23, has enabled South Africa’s Minister of Finance to tackle both government’s fiscal deficit and pressure to increase social spending over the next three years. The fiscal prudence shown in the Medium-Term Budget Policy Statement is likely to please both bond markets and rating agencies.



The minister allocated about R30 billion to assist ailing state-owned entities. In particular, the resolution to the longstanding uncertainly over the Gauteng eToll issue will put Sanral’s finances on a far firmer footing. The minister has also pledged that government will take on a third to two-thirds of Eskom’s debt, which should help the utility to survive and turn around the country’s energy issues.  

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STANLIB economist Ndivhuho Netshitenzhe assesses the key elements of the MTBPS 2022.


Three key aspects emerged from the 2022 Medium-Term Budget Policy Statement delivered by Finance Minister Enoch Godongwana on Wednesday, 26 October, says STANLIB economist Ndivhuho Netshitenzhe. These were the large tax overrun expected for 2022/23; government’s focus on reallocating funds towards infrastructure spending, to lift the country out of a low-growth trajectory; and the allocation of funds to struggling state-owned enterprises and maintaining the Covid R350/month social grant.

STANLIB’s Deputy Head of Fixed Income, Sylvester Kobo, highlights positive and negative aspects of the MTBPS

“The market and rating agencies are likely to applaud National Treasury for the prudence it has shown in the Medium-Term Budget Policy Statement (MTBPS)”, says Sylvester Kobo, Deputy Head of Fixed Income at STANLIB. “Positives were the allocation of most of the revenue overrun to paying down debt, and a pragmatic approach towards supporting SOEs, including SANRAL and Eskom. On the negative side, some of the medium-term revenue and debt projections may prove to be over-ambitious in the current local and global environment.”

South African Medium-Term Budget Policy Statement October 2022 – a brief review


This year’s Medium-Term Budget Policy Statement (MTBPS) was presented under significantly different economic conditions to the February 2022 National Budget. These conditions include: a substantial increase in the cost of living; increased instances of loadshedding; a growing need to improve key infrastructure, including water, transport, and energy; low economic growth; and an uncertain global economic environment amid a war in Ukraine and China’s ongoing zero-Covid policy. This has placed a lot of pressure on the Minister of Finance to increase spending on social payments, salaries, and infrastructure. At the same time, he had to be mindful not to undermine recent efforts to improve SA’s fiscal position and maintain fiscal discipline.


Positively, the Minister seems to have done a good job in balancing competing demands. With that in mind, the key takeaways from this year’s MTBPS were:

  1. A focus on reallocating expenditure towards infrastructure, as well as improved service delivery – in an effort to promote stronger economic growth.
  2. A large tax revenue overrun for the second consecutive year, amounting to R83.5 billion, mostly thanks to strong mining profits from higher commodity prices.
  3. Some clarification on key payments government needs to make, including extending the Covid-19 grant, increases to the public sector wage bill, and additional transfers to SOEs.


Overall, though, it is clear from the vast array of data provided by National Treasury that the current set of fiscal and economic reforms is only expected to begin yielding meaningful results over the next several years. This is reflected in the fact that National Treasury is projecting GDP growth to average only around 1.7% a year over the next four years, while government debt is projected to peak at 71.4% of GDP in 2022/23 before moderating to 70% of GDP by 2025/26.


SA’s weaker economic outlook

National Treasury has revised down its 2022 GDP forecast to 1.9% (from 2.1% in the February 2022 Budget), amid an ongoing lack of policy reform; weak consumer, business, and investor confidence; and the increased occurrence of electricity outages. Unfortunately, the growth estimates for the next three years are also disappointing, with growth estimates for 2023 and 2024 at 1.4% and 1.7% respectively. While these growth estimates appear realistic and achievable, they highlight the lack of vibrancy in the South African economy. In fact, this remains SA’s most significant constraint, especially in job creation as well as broadening the tax base. It is worth repeating that if government makes a concerted effort to implement the needed policy reforms, economic growth could easily exceed these estimates over the medium term.


Encouragingly, National Treasury does envisage a pick-up in fixed investment spending in both 2023 and 2024 after many years of sustained contraction. Presumably this growth in fixed investment is supported by government’s current infrastructure development initiative, including allowing the private sector to get more fully involved in the provision of electricity. 


In terms of inflation, the MTBPS assumes that the average annual rate of increase in consumer prices will moderate towards the midpoint of the inflation target over the next three years, slowly falling from an average of 6.7% in 2022 to 4.6% in 2024. (SA’s inflation target is currently 3% to 6%, although the Reserve Bank has highlighted the need to achieve a target of 4.5%).


Update on tax revenue collection


For the 2022/23 financial year, government is expecting to collect R1.68 trillion in tax revenue, which is a massive R83.5 billion above the budgeted tax revenue presented in the February 2022 Budget. This is the second consecutive year that government has had a tax overrun and it is largely in line with what was expected, given the strong monthly tax revenue collection since April. This additional revenue will grow by +7.6% year-on-year vs a budgeted increase of only +2.2%. The tax revenue-to-GDP ratio is expected to increase from 24.8% to 25.3%.


According to the MTBPS, the tax category that is driving the strong performance in revenue collection continues to be corporate income tax, which is expected to grow by 4.5% year-on-year. This is a massive revision relative to government’s initial estimate that corporate tax collection would decline by -15.1%. In addition, the data shows that it is not just corporate tax where tax collections have been higher than expected. Relatively strong collection also came from personal income tax (expected to increase by 7.7%) and customs duties (30.1%). Unfortunately, government expects to collect less VAT, which is forecast to grow by 11.2%, a downward revision from 12.5% in February. The broadening of strong tax collection means that government has been able to improve underlying tax collection through a better functioning SARS.


The second consecutive year of tax overruns means that government tax collection has fully recovered from the impact of Covid-19-related lockdowns. Tax revenue has surpassed pre-pandemic expectations. For example, in the 2020 Budget, tax revenue was projected to be R1.61 trillion in 2022/23. This means that tax revenue will be almost R71 billion above the 2020 projections.


In the medium term, government’s revenue expectations are encouraging, with collections expected to increase to R1.79 trillion in 2023/24 and R1.91 trillion in 2024/25. While this is an improvement compared with February’s projections (with the overruns coming at R94.6 billion and R99.7 billion respectively), there is a very real risk that elevated mining revenues may become unsustainable, given weakening global activity and moderating commodity prices. There is also the risk that other areas of tax revenue may underperform, given the low growth projections.


It is abundantly clear that without a sustained increase in economic growth, accompanied by an increase in employment and an improvement in tax morality, the South African government may struggle to meet its revenue targets. Without higher economic growth, tax collection will continue to dwindle, scuppering government attempts to meet its social economic objectives.


Update of government expenditure



According to the MTBPS, government’s main budget non-interest expenditure will rise by R37 billion relative to the estimate presented at the time of the National Budget in February 2022. This consists of R54.1 billion in spending increases, partially offset by declared unspent funds, projected underspending and contingency reserve drawdowns. R30 billion of the proposed additional expenditure is expected to be spent on allocations to Transnet (R2.9 billion), SANRAL (R23.7 billion) and Denel (3.4 billion).


In addition, government has allocated additional funds to salaries, given the higher-than-expected wage increase for 2022/2023. So far, the government has offered a salary increase of 3% this year, along with the continuation of the R1 000 per month cash gratuity until March 2023. Unfortunately, this is only a one-year agreement. It is expected to cost the government an extra R10.6 billion in compensation to employees. If no new wage agreement is reached this year, the R1 000 cash gratuity will be automatically extended. In addition, given that unions seem to be demanding at least a 10% increase, there is an upside risk to the government’s wage bill. If it becomes necessary for government to pay the final leg of the 2018 wage agreement retroactively, this would add substantially to the current expenditure overrun.


Interestingly, the Minister of Finance clearly noted that the current social relief of distress (SRD) grant of R350 a month has been extended for one more year until March 2024. The grant currently benefits 7.4 million people at a cost of around R44 billion a year. This is over and above the existing social security grants. Currently 18.6 million South Africans receive a social grant, which is around 31% of the population. Importantly, while discussions are still under way to consider options for a replacement for this temporary grant, a permanent extension of the Covid-19 social relief of distress grant, or a similar new grant, needs to be matched by a corresponding permanent increase in revenue, decrease in spending or combination of the two. This shows that the government is not trying to be populist by using the tax windfall to fund large increases in social spending.


Lastly, the efficiency of government spending has deteriorated significantly over the past 15 years, with the Auditor-General reporting a substantial increase in wasteful and unauthorised expenditure in recent years. This, coupled with high levels of corruption, massively undermines the effectiveness of government services, negatively affecting confidence. It is very encouraging that the Minister of Finance is clearly endeavouring to adhere to fiscal discipline measures.

The curtailment of the fiscal deficit and government debt


The R83.5 billion tax revenue windfall and muted growth in expenditure has allowed the Minister of Finance to present an improved set of key fiscal parameters. National Treasury is now projecting a budget deficit for 2022/23 of -4.9% of GDP, which is an improvement from the -6% that was projected at the time of the February 2022 National Budget. This signals an ongoing commitment by government to fiscal discipline. The reduced borrowing requirement means that gross government debt will decrease to 71.4% of GDP from 72.8% for 2022/23, representing a peak in government debt. Government debt is expected to decline thereafter, reaching 70% of GDP by 2025/26, while debt service costs will rise to 19% of main budget revenue by 2025/26.


While these fiscal parameters remaining concerningly high, they are a substantial improvement over projections prior to Covid-19. However, the deficit and debt targets are only achievable if government continues to implement significant fiscal reforms, especially in relation to salary costs, while ensuring that economic growth improves well beyond 2% a year. This, unfortunately, suggests that the risks to government finances are firmly to the downside until the various initiatives to embed fiscal discipline and lift economic growth have been more fully achieved.


This dire situation is highlighted by the fact that the interest cost of government debt is still projected to grow at a double-digit annual rate for the next three years. This means that in 2025/2026 government’s interest costs alone will represent around 4.8% of GDP, thereby limiting the expenditure choices government can consider over the next few years.

Other policy commitments


Ahead of the MTBPS it was hoped that the Minister would update and clarify a large number of critical fiscal policy issues. Unfortunately, a number of areas remain that the Minister did not adequately address. These include progress on the NHI, a decision on whether the R350 a month special Covid-19 SRD Grant would be stopped or made permanent, an allocation for wage increases beyond the current year, and policy measures that can be effectively implemented to urgently lift economic growth as well as job creation.


In 2016, Minister Pravin Gordhan made the point that “the quality of government spending needs to be improved. Too much public spending is regarded as wasteful, too much is ineffectively targeted and too little represents value for money.” Minister Gordhan stressed that “fiscal resources do not match long-term policy aspirations”. Since then, government’s policy aspirations have increased, while the fiscal resources have deteriorated, limiting government’s ability to close the gap between policy intention and enactment.


Positively, however, in this year’s MTBPS, the Finance Minister focused on allocating money more appropriately. He emphasised the importance of infrastructure investment to lift economic growth, drive employment creation and encourage innovation. In general, the Minister’s speech committed to increasing on-budget infrastructure allocations to remedy the erosion of infrastructure. Over the medium term, government’s consolidated spending on building new and rehabilitating existing infrastructure will increase from R66.7 billion in 2022/23 to R112.5 billion in 2025/26. This includes roads, bridges, storm-water systems and public buildings. Spending on capital assets has become the fastest-growing item by economic classification, a clear step in the right direction




Minister Enoch Godongwana addressed most of the critical fiscal policy issues. In addition, it is clear that National Treasury is committed to ensuring that government achieves an improved level of fiscal discipline over the next few years, which is to be applauded, given the challenging economic, social, and political environment.


Overall, this MTBPS was in line with market expectations. In the short term, financial markets, especially the local bond market, are likely to be fairly pleased with the detail it contained. In addition, it will be encouraging to international investors and credit rating agencies. This is partly because government announced an improved set of fiscal parameters, but also because of the intention to control social payments and salary adjustments. It is clear that the Minister of Finance strongly intends to push ahead with various critical fiscal reform measures in an endeavour to both control the overall increase in government expenditure and increasingly alter the mix of spending away from consumption and in favour of greater fixed investment activity such as infrastructure developments.


Unfortunately, this positive view does not take account of three key concerns. Firstly, controlling government’s wage cost over the next few years is going to remain challenging. Secondly, the projected increase in tax collection over the next three years might be difficult to achieve, given that economic growth is not projected to rise above 2%. Thirdly, there is a still a real risk that various SOEs will require additional government support over the coming years.


Ultimately, there is no substitute for higher economic growth to resolve SA’s fiscal constraints. This can only be achieved through a concerted and co-ordinated effort to lift business and household confidence, improve private sector fixed investment, and enhance skills development and productivity. This will require a much greater effort in implementing key policy reforms. Without these reforms, private sector investment is likely to continue to stagnate, exacerbating the already-high level of unemployment and increasing the risk of further social unrest.


STANLIB Economics Team

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