COVER's Tony van Niekerk interviewed Luigi on the Budget Speech, watch the video, and read the full PPS budget commentary below.

Luigi Marinus, Portfolio Manager at PPS Investments

The National Budget was characterised by the balance between social welfare expenditure and fiscal sustainability amid a disappointing outlook for GDP growth in South Africa. The estimate for GDP growth for 2021 was reduced from 5.1% to 4.8% and forecasted to grow at 1.8% p.a. over the next three years. 

The budget deficit for 2021/22 is estimated at R355bn or 5.7% of GDP and forecast to decline to 4.2% of GDP by 2024/25. However, it is expected to first increase to 6.0% of GDP in 2022/23. The 2021/22 revenue estimate increased by R182bn from the last budget estimate, largely made up by the R105bn increase in corporate income tax, R37bn increase in personal income tax and R13bn increase in VAT. The increase in corporate income tax was primarily as a result of the increased revenues in the mining sector as commodity prices increased over the year. The finance minister stressed that this is more likely a once-off increase and cannot be utilised to cover permanent expenses. This has though allowed for R5.2bn in tax relief with tax brackets and rebates adjusted by 4.5%, resulting in the tax-free threshold increasing from R87,300 to R91,250 and confirmation that corporate tax is set to decline from 28% to 27% for companies with assessments on or after 31 March 2023. 

Debt remains an important budget consideration with government debt having reached R4.3trn and expected to increase to R5.4trn in the medium term which relates to debt servicing costs of R330bn p.a. over this period. On a positive note though, the debt to GDP ratio has moderated to peak at 75.1% which is 3% lower than the peak expected at the time of the mid term budget policy statement. The debt service cost is now greater than any of the individual functional and economic budget classifications with R3.7bn more budgeted for interest payments than basic education (the largest recipient among the various budget classifications) for 2022/23.

State owned enterprises (SOEs) have received R308bn in bail-outs to date and continue to request financial support but strict measures will need to be adhered to for additional funding to be approved. Eskom is however assured of an additional R88bn over the next four years to assist in financial sustainability by reducing their debt burden. While some SOEs will be retained in their current state, rationalisation or consolidation among SOEs are expected. Public-private partnerships are expected to increase with the goal to improve infrastructure development and provide much needed jobs in areas where projects are conducted. 

The social wage bill will be R3.33trn over the next three years, which is 60% of non-interest spending and the department of social development will receive R58.6bn, of which R44bn is for the 12-month extension of the R350 social relief grant. This has become a lifeline for many South African families during the pandemic as unemployment levels have deteriorated and 46% of the population now receiving grants.

The changes to Regulation 28 of the Pensions Fund Act, which increases the allowance to infrastructure projects is set to be gazetted in March 2022 as well as the implementation of measures to allow for partial access to funds by individuals while encouraging greater preservation. This however remains at the discretion of pension fund trustees.

Constructing a credible budget at a time when GDP growth is expected to be somewhat disappointing is not an enviable task. The finance minister has made steps in shifting the narrative away from bail-outs to infrastructure spend with the aim of improving unemployment as many South Africans remain reliant on government grants. The reduction in the budget deficit over the medium term and the focus on SOEs becoming more self-sufficient are positive indicators, but more needs to be done to reduce debt and the cost associated to servicing the debt.