Windfall tax receipts will be used to pay down debt, repair public sector

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Here are some of the highlights from Finance Minister Enoch Godongwana’s Medium-Term Budget Policy Speech on Wednesday.

Godongwana promised growth-enhancing economic reforms, but growth is likely to limp along at a glacial 1.6% a year over the next three years.

The current account surplus rocketed to 3.7% in 2021 as a result of windfall dividends paid by companies. This surplus will narrow to 0.6% in 2022.

Revenue collection exceeded targets across most tax categories, and was revised upwards by R83.5 billion to R1.68 trillion for the current fiscal year.

This allowed government to narrow the budget deficit from 4.9% of GDP in 2022/23 to 3.2% in 2025/6, which will also defray some of the risks from higher interest costs.

This will reduce the need to issue new debt and allow government to better manage the spike in debt redemptions, rein in debt-service costs and gradually restore growth in the baselines of key service delivery and infrastructure programmes.

Stabilisation

Government is using windfall tax receipts to stabilise public debt at 71.4% of GDP in 2022/23, reducing it to 69% by 2024/25. This stabilisation comes two years earlier than forecast at the beginning of this year.

Since 2007/8, public debt has risen seven-fold, from R577 billion to over R4 trillion in 2021/22. As a result, payments on the interest for this debt now exceed spending on essential services like health and security. Interest payments will rise to 4.8% of GDP by 2025.

Over the next two years, R66.9 billion will be allocated for health, education and provision of free basic services by local government. The Covid social relief grant is extended for another year.

Headline inflation will tap out at 6.7% in 2022, falling to 5.1% in 2023. Household inflation peaked at 7.8% in July, the highest in 13 years, before easing to 7.5%.

Read: Treasury lowers 2022 economic growth expectations to 1.9%

A total of R11.3 billion is allocated toward infrastructure investment, including rehabilitating damaged municipal infrastructure and refurbishing provincial roads. R6 billion has been allocated to disaster relief, most of this going to reconstruction efforts in Kwazulu-Natal following flood damage earlier in the year.

Eskom

To ensure Eskom’s long-term financial viability, National Treasury is to take over between one- and two-thirds of Eskom’s R400 billion debt, as part of a series of reforms intended to make it financially sustainable.

This will allow Eskom to focus on plant performance and grid stability.

Eskom is also in the process of being unbundled into three separate companies.

Other SOE assistance

Government is allocating R30 billion to Denel, the SA National Roads Agency (Sanral) and Transnet in the current year – to pay off government-guaranteed debt in the case of Sanral and Denel, and to repair flood-damaged infrastructure and increase locomotive capacity in the case of Transnet.

National government will take over 70% of Sanral’s debt and the Gauteng provincial government 30%.

Gauteng will henceforth be responsible for the maintenance of the 201km Gauteng Freeway Improvement Project.

Denel is to be allocated R3.4 billion which, together with the sale of non-core assets worth R1.8 billion, will help stabilise the company and unlock a committed order book of R12 billion.

Transnet has been allocated R2.9 billion to bring out-of-service locomotives back into service and improve rail capacity.

A further R2.9 billion has been allocated to deal with flood damage in KwaZulu-Natal. National Assembly has passed the Economic Regulation of Transport Bill, creating an independent regulator to encourage greater competition. Proposals for third-party access to the freight rail network and private sector partnerships at Durban Pier 2 and Ngqura are under consideration.

These actions are aimed at reducing crippling debt in state-owned companies and should promote faster economic growth and revenue collection, while reducing contingent liabilities.

SOE funding in future will come with strict pre- and post-conditions.

Non-compliance with these conditions will mean no funding.

Fighting financial crime

There is an additional allocation of R8.7 billion for the police, with further amounts earmarked for other crime-fighting agencies, including the National Prosecuting Authority.

With the threat of greylisting by the Financial Action Task Force (FATF) looming large, government is ramping up its monitoring and prosecution of sophisticated crimes.

To prevent greylisting, two bills have been tabled in parliament to address the 40 recommendations made by the FATF.

The Asset Forfeiture Unit has frozen or granted preservation orders to the value of R12.9 billion and returned R2.9 billion in looted money.

The Special Investigating Unit has instituted four high court cases in relation to contracts worth R62.1 billion, while the South African Revenue Service (Sars) recovered R4.8 billion in unpaid taxes. Sars is currently engaged in 18 projects involving 222 cases.