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Business largely welcomes Budget as aligning to expectations

24th February 2022

By: Tasneem Bulbulia

Senior Contributing Editor Online

     

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Business organisation Business Leadership South Africa (BLSA) says Finance Minister Enoch Godongwana has produced a good maiden Budget that managed to expand expenditure in some areas, while ensuring that government remains on track to consolidate its debt outlook.

“The Budget was also growth-positive in that taxes were largely unchanged and the National Treasury recommitted to the structural reforms called for to deliver faster economic growth,” says BLSA CEO Busi Mavuso.

BLSA notes that the Treasury delivered on its commitment to reduce the corporate income tax rate by 1%, having removed several other tax incentives recently.

While fiscally neutral, it does simplify the tax system which is positive for the business environment, the organisation says.

It highlights that another positive for the growth outlook was the news that implementation of critical structural reforms contained in the Economic Reconstruction and Recovery Programme, particularly in electricity, rail, ports and telecommunications, is being accelerated.

BLSA says it was also encouraged that the Treasury will be implementing the results of a recently completed review of the public-private partnerships framework and that a centre of excellence for private-public partnerships and other blended finance projects will be created.

The organisation has also welcomed the bounce-back loan scheme that was announced by the Minister on February 23, saying the scheme has the potential to help sectors of the economy that have been impacted considerably by the pandemic, particularly hospitality and tourism.

BLSA says the Treasury’s revision of its economic growth estimate for 2021 to 4.8% from 5.1% at the time of the Medium-Term Budget Policy Statement (MTBPS) makes sense, given the country’s challenges and the difficulties faced in the global economic environment.

Of concern to BLSA is the debt burden. This year, government debt has reached R4.3-trillion and it is projected to increase to R5.4-trillion over the medium term.

However, it notes that the Treasury is making some progress in reducing the debt burden, with the consolidated budget deficit projected to narrow from 5.7% of gross domestic product (GDP) in 2021/22, to 4.2% of GDP by 2024/25.

The Treasury now expects to realise a primary fiscal surplus by 2023/24. The debt ratio will stabilise at 75.1% of GDP by 2024/25, three percentage points lower than projected when the MTBPS was tabled.

BLSA says it is also encouraged by the resourcing of the justice system, including strengthened courts. The Department of Justice and Constitutional Development’s allocation was increased by R1.1-billion, while the Office of the Chief Justice will receive an additional R39.9-million.

“The key question is whether this will be sufficient – in our view there will need to be additional resources, some of which might be available from business and other social partners,” the organisation points out.

Regarding social grants, BLSA says it supports the Minister’s view that government is unable to introduce a permanent social grant unless tax revenue significantly increases.

BLSA points out that the Budget also had to contend with negative aspects of public sector performance, especially the R308-billion that has been directed towards bailing out failing State-owned companies (SOEs).

The organisation emphasises the importance of the review of the future of SOEs by the Presidential State-Owned Enterprises Council.

BLSA also believes the state of municipalities urgently requires support, and welcomes the addition of R28.9-billion to the local government equitable share.

It also welcomes the Minister’s assurance that the historically rapid increases in the public sector wage bill will be curtailed.

Compensation spending will now increase marginally, from R665.1-billion in 2021/22 to R702-billion in 2024/25, at an average yearly growth rate of 1.8%.

The Steel and Engineering Industries Federation of Southern Africa (Seifsa) has also welcomed the Budget.

It states that it is a well-balanced approach, outlining plans on supporting the economic recovery of the country against the backdrop of Covid-19 and economic hardships facing both the economy and the metals and engineering (M&E) sector.

Seifsa further welcomes the position adopted by the Treasury that the windfall revenue is not a function of a stronger economy, but rather the consequences of a commodity price boom and that the country will not fund permanent expenditure from short-term surpluses.

“In our view, the Minister has taken a progressive step of using the windfall to improve some of the macroeconomic metrics. Notable is the primary budget surplus which is expected as early as the next fiscal year (2023/24) and the reduction in the consolidated budget deficit from 5.7% of GDP in the 2022/23 to 4.2% of GDP in 2024/25.

“The fact that the surplus will also contribute to reducing the country’s borrowing requirements is a positive step considering the already high public debt level and associated debt servicing costs of R330-billion a year,” Seifsa economist Palesa Molise states.

The Federation says it is also encouraged by plans to foster growth by stabilising electricity supply, as energy supply is one of the most critical areas of concern for the M&E sector.

However, the organisation is also of the view that not enough attention was given to the structural reform programmes that are needed to support economic growth.

“The projected real economic growth rate of 2.1%, to average at 1.8% over the next three years, is far too weak to provide a platform for higher demand for M&E sector products such as steel.

“A poor growth scenario and the persistent existence of downside risks from erratic electricity supply will regrettably have additional cost implications for producing companies in the M&E cluster,” Molise comments.

North West University Business School economist Professor Raymond Parsons says the Budget speech reflected a realistic assessment of the country’s economic situation, identified the risks that still need to be managed and highlighted the importance of anchoring appropriate fiscal strategies for now.

He also acclaims that it had several confidence-building features.

“On the back of a strong revenue performance and lower expenditure since the MTBPS, in November, debt metrics have improved. The Budget speech also recognised the extent to which South Africa’s economic fortunes were linked to economic diversification and higher inclusive growth in future.

“It was also possible for the Budget to make appropriate tax decisions given the present weak state of the economy. The broad message of the Budget is positive for business and consumers,” Parsons comments.

However, he cautions that it is not clear yet whether the 2022 Budget represents a step change in the growth prospects for the country, with it offering a modest average growth projection of 1.8% over the next three years.

Less optimistic is market researcher Intellidex, which says the fiscal and debt metrics are better in the short run, but less so in the medium run.

“There was some angle on Eskom legacy debt being worked on, but no solution offered. There were important announcements on the carbon tax. Financial sector reforms were disappointing, especially regarding exchange control changes having stalled.

“Though a new loan guarantee scheme is being launched, it remains to be seen what appetite there will be from banks as much as on the demand side, given it will be eight months after the July unrest,” Intellidex states.

TAX
Professional services firm PwC notes that, as was widely expected, the government did not announce any increase in the value-added tax (VAT) rate, although the Minister has stated that the tax rate will need to increase in the future.

The proposed amendments affecting VAT are largely technical in nature, it points out.

PwC says it was surprising that government did not increase the Road Accident Fund levy or the fuel levy, largely owing to concerns about the affordability of petrol and diesel as prices now exceed R20/ℓ.

It also highlights, as notable, that government proposes above-inflation increases in alcohol and tobacco excise duties.

PwC also expects environmental taxes will increasingly become a more significant contributor to national revenues in the future.

INFRASTRUCTURE AND RED TAPE
Industry organisation Consulting Engineers South Africa (CESA) says it is pleased to hear that government is looking at value for money and quality of delivery as the top priority in the development of the infrastructure project pipeline.

It posits that this is particularly important to ensure the sustainable development of infrastructure.

“As a cash-strapped country with low economic growth prospects, it is now more than ever imperative that we spend our money wisely. When you are looking at the cost of an infrastructure project, you need to consider the total cost of ownership spanning the typical 30 years or more of the project lifecycle,” emphasises CEO Chris Campbell

He says a quality cost-based selection option should be pursued, where evaluation is based on cost as well as technical capability, with quality being the most important factor.

“We have, for some time, been ‘beating the drum’ on the need for value for money and quality delivery in our infrastructure investment pursuits. It is with great excitement that we hear the Minister make this very statement in his Budget speech. As an industry we welcome the implementation of this approach,” Campbell says.   

CESA says it is also eager to contribute to the revised Public Procurement Bill that will be tabled before Parliament in 2022/23.

This is in light of the recent Constitutional Court judgment on the preferential procurement regulations, and the first Zondo Commission report highlighting abuses in State procurement.

CESA also welcomes government plans on taking bold steps to improve State capability and reduce the scope for procurement corruption.

The Banking Association of South Africa (Basa), meanwhile, says the allocation of R17.5-billion over the medium term for catalytic infrastructure projects is noted, but that it believes more funds can be released in a shorter time if government moves faster to approve bankable infrastructure projects and removes bureaucratic obstacles to their financing and construction.

"Removing unnecessary bureaucracy and maladministration and increasing State efficiency is the most effective, cheapest way of securing investment in economic and social infrastructure. The 1% reduction in the corporate income tax rate, to 27%, will also do much to encourage business," it comments.

Basa encourages Godongwana and the rest of Cabinet to "move rapidly" to implement President Cyril Ramaphosa’s commitment to reduce red tape and improve the ease of business, especially for small and medium-sized enterprises.

"Economic studies have repeatedly made it clear that government needs to tackle the microeconomic drivers that are hindering the country’s productivity. As we have said before, facilitating entrepreneurship and small business development are among the surest and fastest ways to boost inclusive economic growth and job creation, without having to introduce new programmes and additional spending," it states.

South African Chamber of Commerce and Industry (Sacci) CEO Alan Mukoki, meanwhile, stresses that government has to "inject a level of high urgency" to enable South African exports to be globally competitive.

"We need better rail and ports infrastructure as a matter of urgency to take advantage of rising commodity prices. It is difficult to get rail capacity for coal and other commodity exports and even more difficult to get increased access at facilities such as the Richards Bay Coal Terminal," he points out.

Mukoki adds that Sacci is looking forward to discussing the bounce-back scheme for SMEs with the Minister.

"We would have expected more serious investment to be deployed in this area as it is business-generated taxes that form the bulk of government revenues. The SME sector carries the hope of creating jobs and removing the need for welfare.

"This is the only sustainable way of creating jobs and increasing government tax revenue. The investment should therefore be commensurate with the challenge of alleviating unemployment. We dare not fail in this area," he asserts.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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