National Treasury sees investment recovery by both the public and private sectors as key to improved economic performance in South Africa, notes academic and former public finance head, Andrew Donaldson.  

With real economic growth projected to average just 1.4% over the next three years, finance minister Enoch Godongwana had little room for manoeuvre.

“Consolidation” has been the central theme of fiscal policy at least since 2018. This budget again signals expenditure reductions in real terms, and below-inflation adjustments to public service remuneration.

Nonetheless, the revenue outcome for 2022/23 will exceed the original estimate by over R90bn, with the gains largely going to reducing the budget deficit. This means that National Treasury will start the 2023/24 year with cash balances of R235bn, effectively pre-funding a substantial part of next year’s borrowing requirement. The share of outstanding bonds held by foreign investors has declined from 41% in 2017 to 26% in December 2022, and the average term to maturity is over 11 years.

Prudent and forward-looking debt management remains a hallmark of the Treasury’s stance. This is an important backdrop to the central feature of the 2023 Budget – Godongwana’s announcement of a R254bn debt relief programme for Eskom.

Over the next three years, the Treasury will provide cash transfers to Eskom (written up as subordinated loans) to cover its debt redemption and interest obligations. In the final year, a further R70bn in Eskom debt will be taken over.

Taxpayers are, in effect, standing in for Eskom’s customers and compensating for its cost overruns and system failures. While the debt takeover cannot itself relieve the electricity crisis, the reduced debt liability makes it possible to complete the separation into financially viable transmission, generation and distribution businesses.

Implicit in the conditions attached to the debt relief package, private investors will in future be partners in financing the capital requirements and operation of Eskom’s remaining generation plants.

South Africa’s institutional investors and pension funds have long sought appropriate vehicles for contributing to the country’s infrastructure investment needs. Alongside the potential concessioning of power plants, Transnet has recently announced that it is seeking a private partner for its main Gauteng-Durban freight rail service.

Digging deeper into the Budget review, annexure D outlines considerable progress in clarifying how “blended finance” arrangements are being implemented and how the public-private partnership regulations will be adapted to facilitate more streamlined project funding. There is a growing number of infrastructure projects listed “in implementation” or close to financial close in a range of sectors: bulk water supply, housing, hospital construction, schools, water treatment and port facilities, amongst others.

It has been a long, slow evolution of infrastructure plans and processes, but it seems likely that public investment project implementation is gathering momentum.

The Budget review signals clearly that the Treasury sees an investment recovery by both the public and private sectors as the key to improved economic performance. On this score, tax concessions have been announced to encourage businesses and households to invest in renewable energy capacity.

In the present circumstances, energy-intensive projects and industries reliant on freight rail are likely to be held back. This is an opportunity to diversify into other sectors.

As a component of a development strategy focused on improving living standards, investment in housing and township renewal is critical. This is largely about municipal initiatives, and especially our cities. The Treasury’s extension for a further two years of the urban development tax incentive is a welcome contribution to building an enabling environment for accelerated investment in urban infrastructure.

Progress will depend, however, on effective responses to both administrative bottlenecks and disruptive interference with construction and building projects.

We all know that South Africa’s retirement and long-term investment funds are powerful vehicles for mobilising the capital required for a growing economy. Tax provisions underpin these arrangements: the Treasury’s estimate is that deductibility of retirement fund contributions accounted for R97.7bn in revenue foregone in 2020/21, or about 40% of all tax expenditures and 8% of gross tax revenue.

It is also evident that the retirement fund reforms of recent years have improved the effectiveness of the system in lifetime income smoothing. Reforms currently under discussion will assist further in securing provision for retirement while providing access to funds to meet pressing needs.

The Budget review indicates that four aspects of this reform are still to be finalised: a proposal for seed capital, equitable inclusion of defined benefit funds, legacy retirement annuity funds and withdrawals from the retirement portion in the event of retrenchment. Industry stakeholders should look out for the opportunity to comment on these proposals.

The 2023 Budget contained no tax policy surprises, except perhaps that full relief was provided for the effect of inflation on personal income tax. There were upward adjustments of 10% in the thresholds of the retirement fund lumpsum and lumpsum withdrawal tax schedules. The retirement contribution deduction limits remain unchanged. In the final analysis, the Budget delivered Eskom debt relief and tax incentives for energy investments, as was widely anticipated. For the rest, it might be characterised as a holding operation. Bolder fiscal projections await the political consolidation behind a coherent growth strategy that the country needs. 

* Donaldson is a research associate at the Southern Africa Labour and Development Research Unit at the University of Cape Town, and former head of Public Finance at National Treasury.

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