This year’s National Budget, delivered on Wednesday, was dominated by South Africa’s power woes, with Finance Minister Enoch Godongwana announcing that government will take over a large part of Eskom’s debt.
In addition, major tax incentives were announced to encourage more South Africans to embrace renewables and get off the grid.
The Budget confirmed that South Africa has stepped further away from a fiscal cliff that loomed in 2020, with its ballooning state debt starting to stabilise, and tax revenue larger than previously expected. But Godongwana warned of major risks ahead.
State of government finances
Thanks to stronger-than-expected tax revenues, South Africa enjoyed a main budget primary surplus meaning that government spending (excluding debt interest payments) is less than the revenue it received – for the first time since 2008/09. Government’s tax income was almost R94 billion more than it expected a year ago.
This will help the government’s budget deficit to decline from 4.6% of GDP in 2021/22 to 4.2% this year. Next year, it’s expected to narrow to 4% of GDP, the lowest since 2019/20.
However, its total debt has now reached almost R5 trillion while it earns less than R1.7 trillion in tax a year. The cost of paying off its debt has ballooned to more than R360 billion a year. Some 18% of all government revenue (mostly from tax) is now spent on debt repayments, and that will increase to almost 20% by 2025/26. The cost of repaying debt is now climbing by almost 9% a year the Budget’s fastest-growing spending item.
Also, storm clouds are gathering. South Africa enjoyed a mining tax boom in recent years thanks to rallying commodity prices. These prices have since cooled down, and Transnet’s railing woes mean mines are struggling to move and export their goods, hitting their profits and tax contributions. In addition, record levels of load shedding are hurting the economy, and shrinking tax payments.
Last year, Treasury expected that the economy will grow by 1.4% this year this has now been downgraded to 0.9%.
Eskom debt relief
Eskom is struggling with a debt burden of around R400 billion, and massive debt repayments mean it can’t afford to buy diesel for emergency power generation, or make urgent investments in the electricity grid, and is constrained in doing maintenance and other crucial work.
Government will take now on R254 billion of Eskom’s R400 billion debt over the next three years. Some R184 billion will be paid directly to Eskom over the next three years, to settle loans. In 2025/26, government will take over R70 billion of Eskom’s loans.
Strict conditions will apply, including that Eskom must implement recommendations from an independent assessment of its operations, which has been commissioned by the National Treasury. Eskom may have to hand over the management of some of its power stations to private companies. Also, Eskom will also have install a set number of prepaid electricity meters.
Government spending will remain tight
“This is not an austerity Budget. It is a Budget that makes tough trade-offs in the interests of the country’s short and long-term prosperity,” said Godongwana.
But government spending for the next year will increase by only 2.9% – far below the current inflation rate of 7%. Currently, the health budget allocation for the next year is lower as the actual amount spent in 2022. According to acting Treasury director-general Ismail Momoniat,this is due to a normalisation following higher allocations during the pandemic but he also warned that the “stealing” in the department needs to stop, referencing the Tembisa hospital tender racket that may have claimed the lifeof whistleblower Babita Deokaran.
Economic development and infrastructure spending will see the biggest hikes in spending, while education will again receive the largest allocation (24%).
Government has only allocated an increase of 3.3% in the public sector wage bill, which is currently being contested by unions.
“An unbudgeted wage settlement will require very significant trade-offs in government spending,” Godongwana warned.
Money will have to be saved, including by freezing non-critical posts. Godongwana also spoke about savings that the “major rationalisation” of state entities and programmes could bring. Recommendations for rationalising or closing of public entities will be made in next year’s Budget.
Tax incentives for solar and other green energy
Businesses will now be able to deduct 125% of the cost of wind, solar, hydropower and biomass projects in the first year with no limits on how much can be claimed, nor how big the project is.
For example, a renewable energy investment of R1 billion would qualify for a deduction of R1.25 billion from taxable income. This applies to all new projects between 1 March 2023 and 28 February 2025.
To qualify, the solar panels must be purchased and installed at a private home, and a certificate of compliance for the installation must be issued from 1 March 2023 to 29 February 2024.
Income tax adjustments
Income tax rates have not been hiked, but instead have been adjusted lower for inflation – which means that in rand terms, taxpayers will pay less. For example, an individual younger than 65 years who earns R500 000 a year, will pay R4 721 less a year.
The annual tax-free threshold for a person under the age of 65 will increase to R95 750.
Retirement tax and transfer duties have also been adjusted for inflation, which will in effect lower rates.
Fuel taxes
For the second year in a row, the general fuel and the Road Accident Fund (RAF) levies won’t be hiked. However, the carbon fuel levy will increase by 1c to 10c/l for petrol and 11c/l for diesel from 5 April 2023.
Food manufacturers get a fuel levy break but only for generators
For the next two years, food manufactures will get a refund on the RAF levy they pay for diesel used in the manufacturing process, particularly generators. The levy comes to R2.18 a litre.
The regulations for the refund requirements will still be gazetted, but Treasury officials say that SARS will launch an audit process, which will including log books, to track that the diesel was only used for manufacturing and not transport.
Social grants hiked by 5% – but the R350 grant remains R350
Spending on social grants will increase from R233 billion in 2022/23 to R248.4 billion in 2025/26, with the Covid-19 social relief of distress grant extended for another year until 31 March 2024.
“Government is still considering alternative options to provide appropriate social protection for the working-age population that can replace or complement the current grant,” Treasury said in the Budget statement.
Funds spent on the grant are lower than projected in 2022/23 due to improved means testing.
The grant will remain at its current level of R350, while other grants are increased by 5%.
SAA, Post Office get extra money
South African Airways (SAA) will get another R1 billion to assist its business rescue process, with government saying that it will consider additional funding subject to “strict conditions” to allow the strategic equity partnership deal with the Takatso consortium to be finalised. “As a condition of such funding, all government guarantees to SAA will be cancelled.”
The South African Post Office will also get another R2.4 billion to implement its turnaround plan.
Booze, cigarette taxes
Excise duties on alcohol and cigarettes will increase by a below-inflation rate of 4.9%, while sparkling wine will only see an increase of 0.7%. Tax on a pack of cigarettes will increase from R19.82 to R20.80, while the excise duty on a can of beer will increase from R2.06 to R2.17.
No sugar tax hike but levy on fruit juice planned
Given increased imports and the effects of the recent floods in KwaZulu-Natal, the sugar tax won’t be hiked in the next two years. This will enable stakeholders in the sugar industry to restructure, Treasury said. Government will soon publish a discussion paper to extend the sugar tax on pure fruit juices and to lower the current 4g threshold on soft drinks.
Big increase in oil and gas royalties
Government considered a flat royalty rate on oil and gas companies, but decided instead to keep its current flexible royalty rate, which is determined by profitability. “This decision recognises that companies face varying costs and profit levels depending on whether they are, for example, operating in deep or shallow waters.”
However, the minimum royalty rate will be increased from 0.5% to 2%, with the maximum remaining at 5%.