Kathy Gibson reports – Amid bearish predictions about economic growth, most (59%) of South African CEOs expect local GDP growth to decline this year.
Among the challenges businesses are grappling with are structural issues, while electricity supply is having a major impact on where growth could be.
Lullu Krugel, PwC South Africa partner, chief economist and ESG platform lead, draws the analogy of a car that can safely drive at 170kph, only able to safely go at 60kph because of the poor condition of the roads.
“We are significantly underperforming as a country,” she adds.
Although big business and some households have been able to respond to loadshedding with alternative solutions, which could potentially provide an economic boost, the majority of South Africans have no other options and remain severely affected.
More worrying is the fact that a changing global environment is driving a need for businesses to rethink their operations. “PwC’s Global CEO survey shows that business leaders believe that is they continue to follow their current business trajectories, they will not be around in 10 years’ time,” Krugel says.
Climate change and the risks associated with that are coming down the line, she explains, and companies need to get their strategy aligned with this environment.
The fiscal deficit is expected to increase again this year due to slower GDP growth and increased spending pressures. We expect it to come in at around 5,5% as a result of increased fiscal pressure and government spending,” Krugel says.
On the expenditure side, it is expected that the finance minister will continue to show strong expenditure restraint as far as possible.
The major risks in terms of expenditure include state-owned enterprises (SPEs) – Eskom and Transnet in particular – as well as the publica sector wage bill.
There are also several large budget items which remain unfunded over the medium-term including the Basic Income Grant (BIG) and National Health Insurance (NHI).
Krugel expects that these will remain underfunded.
In terms of debt, the government has committed to stabilise debt below 80% of GDP level. The MTBPS projected a peak of 74% of GDP this year.
PwC expects this budget will include details on the pledge to restructure Eskom’s debt.
Government has also been talking about rationalising the SOEs – of which there are more than 200 – by disposing of or combining entities with shared and overlapping mandates.
“In the past, we expected government to provide services that the private sector couldn’t, but this has largely changed, with the private sector now able to provide more services. “And it is no longer the case that services rendered by the private sector are more expensive,” Krugel says.
Balance sheet restructuring is another intervention that the Treasury has already started implementing, with R33-billion already allocated to Transnet, Sanral and Denel to repair their balance sheets.
The pace of change is slow, though, Krugel adds.
A couple of the ratings agencies have improved the country’s outlook, which is good news, she says. “A credible budget which sticks to the defined long-term fiscal framework will be ratings positive.
“There is a strong sense over the last couple fo years of the importance of realistic forecasts as put out by government.”
The public service wage bill, always a contentious issue, is still 31,6% of the budget – although this has decreased from 34,5%. Government intends to reduce this further to 30,8% by 2024/25, although there are doubts about whether this can be achieved.
The social relief distress grant (SRD) has been extended until March 2024 as government considers a permanent solution, but there is still uncertainty over the fiscal framework after 2022/23 due to clarity on the SRD and BIG.
In terms of municipal finance, PwC believes the constraints over the last couple of years – and in turn the pressure that puts on Eskom and thus government – are an important issue. “Service delivery happens is at local government level – and it is not just the smaller municipalities that are feeling the pressure; it is across the board,” Krugel says.
So she thinks that, in the budget, there should there should be some discussion about how municipalities can become more involved.
Tax revenues are expected to be higher than initially expected, in line with the medium-term budget policy statement (MTBPS), says Kyle Mandy, PwC South Africa tax policy leader.
Actual revenues are forecast to be in line with the MTBPS, which revised tax collection estimates from R1 598-trillion to R1,682-trillon.
Both corporate and personal taxes are performing strongly, painting an overall positive picture.
However, South Africa still has a record tax burden level at more than more than 25% of GDP. Individual taxes are still the biggest contributor at 9%, then corporate tax, which has recovered strongly, at just under 7%. VAT is declining slightly and is less than 5%.
No significant corporate tax changes are expected to be announced in the budget.
Mandy says there could be an announcement about a global minimum tax rate of 15%, and some incentives around depreciation and investment allowances, R&D, and energy investments.
On a personal income tax (PIT) level, South Africa still has the highest PIT burden among upper middle class countries, and government aims to reduce this over time by increasing the tax base through greater economic growth, employment and enforcement.
There could be some moderate personal tax relief, as well as an inflationary adjustment in medical tax credits. Retirement reform could also be on the cards, and there is an ongoing review around remote working.
No changes are forecast for property taxes, and a new wealth tax is unlikely to be introduced now, if ever, Mandy adds.
In terms of indirect taxes, there should be no significant changes in VAT policies, but we can expect inflationary increases in alcohol and tobacco taxes.