South African Budget Speech: Our Detailed Break Down

Eskom and the power crisis remain in the spotlight:

Embattled utility state enterprise, Eskom has been allocated a whopping R250 million, spread over three years by minister, Enoch Godongwana. During his budget announcement held in Cape Town, the finance minister pointed out that the allocation to Eskom will enable government to take over a much larger portion of its debt. There’s a catch though to the massive bail out, as some of the power stations will have to be concessional to private players and restructuring.

Additional takeaways:

• 207 days of load shedding were experienced in 2022 compared to 75 in 2021.

• The Eskom debut arrangement will increase the government’s gross loan debt from R4.73 trillion in 2022/23 to R5.84 trillion in 2025/26.  

Public service wage bill tops R700 billion:

The public sector payroll is expected to balloon up to R701.2 billion, surpassing last year’s total of R690 billion. This level is expected to be breeched in 2025, thereby forcing treasury to upwardly revise their 2026 estimates to R760 billion in line with the forecasted annual increase rate. As expected, trade unions will voice their demands and negotiate with their employers leaning towards an above inflation salary increase. During his speech, the finance minister highlighted that there’s a need to strike a balance between fair compensation, fiscal sustainability and managing an already stuffed headcount.  

Additional takeaways:

• Government is poised to table a 3.3% increase for the state wage bill for the upcoming 3 years.

Beefing up security:

South Africa’s ongoing war against crime went a notch up as finance minister Godongwana vowed to avail funds to beef up security and prosecuting agencies. A tune of up to R7.8 billion will be rolled out in the next three years to increase the police count and fund the Financial Intelligence Centre, the Special Investigating Unit and tax collection agency. The National Prosecting Authority will receive a boost of an additional R1.3 billion to deal with specific complex crimes such as financial. This development comes at the wake of the imminent FATF decision and possible grey listing on South Africa.  

Additional takeaways:

• A total of 3.3 billion will be allocated to a new border management agency that will come into effect in April. The agency will manage all ports of entry and will be responsible for countering the illegal movement of goods and people.
• More emphasis on money laundering controls targeting, the crypto currency space, estate agents and legal professionals.

Tax reliefs to cushion from load shedding:

Finance minister Godongwana announced a much-needed tax incentive of around R13 billion to spur investment in the solar energy space. Under section 12B of the income tax act, government has made some wide-ranging changes to encourage the business sector to invest in renewable energy alternatives. Section 12B allows for a 100% 1^st year write off for photovoltaic projects below 1 megawatt (MW). Business can deduct 50% of the costs in the 1^st, 30% in the 2^nd and 20% in the 3^rd year for qualifying projects in solar, wind, biomass, photovoltaic (above 1 MW) and hydropower (below 30 MW).

Households have also been hit hard by the unending power cuts and they finally got some relief from the government. A rooftop solar incentive has been tabled for private individuals to invest in energy generating projects. R4 billion has been set aside to back this incentive as individuals will be able to receive a tax rebate up to the value of 25% of costs of any new and unused solar panels. However, the relief is only up to a maximum of R15,000 per individual and applicable for one year as it can be used to offset personal tax liability for the year 2023-24.

R4 billion has been conceded by the fiscal authorities due to forgoing an increase towards the general fuel levy. Global fuel prices have been on an upward trend and South Africa has not been spared from this due to a weaker rand, supply/demand imbalances and crude oil prices. The levy relief which was generally applied to primary industries has been extended across the board to accommodate manufactures of food products. This will soften the inflationary blow on consumers, as manufacturing cost to power generators etc. are transferred onto food prices.

Cheers erupted during the budget speech as the finance minister announced that there will be no tax increase for South Africans. Amid tightening economic conditions, the already hard-hit taxpayers were spared from tax increases as government made a trade off with taxpayers and an economy which is still reeling from macro and micro economic shocks. The decision was somehow backed by SARS expected gross revenue collection of R1.69 trillion for 2023, R93 billion higher than last year surpassing the 2022 estimates. However, a word of caution was thrown in by the minister as risks linger from fiscal indiscipline resulting for SOE bail outs, the replacement of the Covid-19 social grant with a permanent alternative and the ever-skyrocketing public service wage bill.  

Additional takeaways:

• Personal income tax brackets will now be used to make inflation-linked adjustments for tax purposes.
• The retirement tax free withdrawal threshold has now been increased to R550 000.
• The property transfer bracket has been upwardly revised by 10% removing transfer duties on properties below R1.1 million.
• Drinkers and smokers will have to cough up more; 10 cent increase for a can of beer and 98c rise in the price of a box of cigarettes.  

The grim story of underperforming parastatals:

It was no surprise that problem children, South African Airways (SAA) and the Post Office would receive financial boosts from the 2023 budget. Minister Godongwana allocated R1 billion to the local airline and a further R2.4 billion was allocated to the state-owned postal services company. The SAA allocation is aimed at assisting with the airline’s business rescue process, along with helping to conclude outstanding historical debt obligations – additional conditional funding will be considered (sorry taxpayers). The R2.4 billon allocation to the Post Office is aimed to implement and speed up its turn-around strategy and reduce contingent liabilities.

The default ridden Land Bank showed signs of life since April 2020 when it failed to meet its debt responsibilities. As discussions with its lenders are currently ongoing, the remedial action plan which included addressing poorly performing investments and a reduction in administrative fees seems to be working as the FY2021/22 net profit amounted to R1.4 billion compared to the 2020/21 net loss of R747 million.

Under the 2020 Adjustment Appropriation Act, R2.9 billion was allocated to Transnet in a bid to cater for locomotive repairs and maintenance plus resuscitate infrastructure destroyed by the April 2022 KZN floods. Surprisingly, the railroad parastatal had been underinvested over the years and Minister Godongwana assured the nation that, capital will be injected to address maintenance backlogs, exploiting integrated commodity value chains, increasing capacity of existing infrastructure and increasing access to the rail network through accommodating the private sector.

Arms manufacturer Denel received a purse of R3.4 billion through the 2022 Special Appropriation Act. The strings on the purse will only be untied at the end of March 2023 under special conditions hinged to the implementation of its proposed turnaround strategy and when clarity is provided on its sustainable business model. The company remains in financial turmoil and to make matters worse it still hasn’t published its year end results.  

Additional takeaways:

• The continuous deterioration of state-owned entities has been a headache for SA’s finance ministers with the liabilities swelling from R84.4 billion in 2008/9 to R478.5 billion in 2022/23.

Overall additional take aways:

• The budget might have confirmed that South Africa had taken positive direction in addressing is massive government debt but major hurdles are ahead.
• The government budget shortfall declined to 4.2% of GDP for the year 2022/23 from 4.6% in 2021/22. The 2023/24 deficit is expected to shrink to 4%, a figure last seen in 2019/2020.  

• South Africa has enjoyed stronger than expected tax revenues, resulting in a surplus for the first time since 2008/09.
• The cost of servicing the R5 trillion government debt against an earning of R1.7 trillion, has risen by 9% to more than R360 billion a year.
• The education sector received the largest overall allocation of 24%, but economy and infrastructure spending have the biggest hike.  
• Minimum royalties on extracted fuels will be increased from 0.5% to 2% with the maximum cap remaining unchanged at 5%. Carbon levies will also increase from the 5^th of April; 11 cents for a litre of diesel and by 1 cent on gasoline.
• South Africa’s unemployment rate of 32.9% is expected to rise as the pace of job creation is likely to slow down in 2023.

Disclaimer: The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.

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