<!-- wp:paragraph --><p><strong>Mamello Matikinca-Ngwenya, FNB Chief Economist</strong></p><!-- /wp:paragraph --><!-- wp:list --><ul><li>Gross revenue estimated to be R1.55 trillion in 2021/22, reflecting a R61.7 billion overshoot relative to the 2021 MTBPS projections. Revenue grows by an average of 5.3% per annum between 2022/23 and 2024/25. Revised tax revenue projections are higher by an annual average of R83.2 billion over the medium term relative to previous projections.</li><li>Expenditure growth for the current fiscal year estimated to align with previous projections but reaches R2.1 trillion by 2024/25, reflecting an annual average growth of 3.4%.</li><li>Fiscal deficit estimated at R346.9 billion (5.5% of GDP) for 2021/22, compared to R409.9 billion (6.6% of GDP) previously. It gradually narrows to 4.5% of GDP by 2024/25.</li><li>Crucially, the primary deficit (i.e., excluding interest expenditure) improves from an estimated 1.3% of GDP in 2021/22 to a surplus of 0.6% of GDP by 2024/25, reflecting continued commitment to fiscal consolidation and sustainability.</li><li>Interest expenditure (i.e. debt-service cost, 14.2% of total main expenditure) grows from R268.3 billion in 2021/22 to R363.5 by 2024/25, reflecting average annual growth of 10.7%.</li><li>Gross government debt (total debt stock) peaks at 75.1% of GDP in 2024/25 (from 69.5% in 2021/22), a year earlier than the previously projected peak of 78.1% of GDP in 2025/26.</li></ul><!-- /wp:list --><!-- wp:image {"id":148369,"sizeSlug":"large","linkDestination":"none"} --><figure class="wp-block-image size-large"><img src="https://cover.co.za/wp-content/uploads/2022/02/FNB-budget-1024x454.png" alt="" class="wp-image-148369"/></figure><!-- /wp:image --><!-- wp:paragraph --><p>In summary, we assess the 2022 Budget speech (the first official annual Budget speech by Finance Minister Enoch Godongwana) as cautiously indicating government’s commitment to continued gradual fiscal consolidation, which provides much needed fiscal policy certainty and sustainability. We maintain our view that the extent to which government is able to achieve fiscal sustainability will be dependent on implementation of expenditure restraint and accelerated growth-enhancing reforms.&nbsp;</p><!-- /wp:paragraph --><!-- wp:paragraph --><p>While sticking to the fiscal consolidation path (albeit with implementation risks), the budget also recognises the need to support the ongoing fragile economic recovery. In this regard, the 2022 Budget is aligned with our expectations of no growth-negative tax rate adjustments. Instead, the Budget provided income relief of about R5.2 billion to consumers, largely from adjusting income brackets in line with inflation, and by not increasing the Fuel and Road Accident Fund (RAF) levies. This is critical for supporting the ongoing fragile economic recovery (in the context of steepened living costs) and should counteract the negative impact of several headwinds, ranging from higher energy and food prices to a relatively less accommodative interest rate environment.&nbsp;</p><!-- /wp:paragraph --><!-- wp:paragraph --><p>Furthermore, Treasury will proceed&nbsp;with implementing the corporate income tax rate reduction to 27% (from 28%) for companies with assessment years ending on or after 31 March 2023. Such a policy position, together with promising growth-enhancing reforms (see details overleaf) aimed at reducing the cost of doing business and improving efficiencies, should ultimately boost private sector fixed investment, and, to some extent, employment growth.&nbsp;</p><!-- /wp:paragraph --><!-- wp:paragraph --><p>Ultimately, the continued slack in the labour market poses downside risks to consumption expenditure. In this regard, Treasury has increased the employment tax incentive by 50% to R1 500 effective 1 March 2022. This, together with the President’s request to companies to reduce the experience requirement when hiring young people, should somewhat help curb the stubbornly elevated youth unemployment rate. The Presidential Employment Initiative has already supported 840 000 people through job creation, retention and livelihood support. An additional R18.4bn will be spent over the next two years and should support 500 000 people. In addition, the employment tax incentive has been expanded with support valued at R2.2 billion.</p><!-- /wp:paragraph --><!-- wp:paragraph --><p><strong>Treasury’s growth projections settle at 1.8% 2022-2024, not enough for jobs</strong></p><!-- /wp:paragraph --><!-- wp:paragraph --><p>As expected, Treasury slightly trimmed its 2021 growth estimate to 4.8% (from 5.1% previously), almost aligning with our long-standing forecast of 4.7%. This adjustment reflected the worse than expected impact of the July social unrest and Transnet cyberattack. Over the medium term, Treasury's growth prognosis settles at an average of 1.8%, which is not enough to create much needed employment. It is also not adequate to widen permanent sources of the revenue base needed to provide a social safety net to the most vulnerable people. However, no decision has been made on the Basic Income Grant (BIG) yet. Low economic growth poses risk to fiscal sustainability and the pressure for large social spending support could mount. We think that Treasury's medium-term growth projections are understandably built on conservative assumptions about the pace of economic reforms. We concur with Treasury that there are risks to the growth projections emanating from new Covid-19 variants, persistent electricity supply interruptions, rising inflation and borrowing costs, and faster than expected tightening of global financial conditions.&nbsp;</p><!-- /wp:paragraph --><!-- wp:paragraph --><p>Treasury believes that reforms are critical to economic and employment growth and in this regard is prioritising 55 projects valued at R595 billion in areas such as water and sanitation, energy, transport, health and education. Over the MTEF, infrastructure spending is expected to sum R812.5 billion and presents valuable opportunities for public-private partnerships as well as employment opportunities through the infrastructure sector. Government is determined to implement reforms aimed at&nbsp;<strong>stimulating demand through investment in infrastructure; employment programmes, tax incentives and social transfers that should boost consumption; easing the skills constraints; and modernising network industries,</strong>&nbsp;which should ultimately lead to increased productive capacity.&nbsp;</p><!-- /wp:paragraph --><!-- wp:paragraph --><p>Treasury’s inflation forecast is benign relative to ours by an average of 0.2ppt, averaging 4.8% this year and stabilising at 4.4% and 4.5% in 2023 and 2024, respectively. We think that a higher oil price is a risk to domestic inflation and our understanding is that Treasury’s near-term oil assumptions are relatively conservative.</p><!-- /wp:paragraph --><!-- wp:paragraph --><p><strong>Wage bill: some implementation risk</strong></p><!-- /wp:paragraph --><!-- wp:paragraph --><p>The wage bill will increase by a cumulative R37 billion (from R665.1 billion in 2021/22)over MTEF reaching R702 billion by 2024/25. Notably, the terminal point is still higher than previous projections – showing that wage pressures continue to mount. On average, wage bill growth is projected at 1.8%. The risk is that unplanned spending in 2021/22 was R20.5bn, higher than what was projected at the 2021 budget and close to what has been accommodated over the entire MTEF. Moreover, although Treasury has made allowance for the extension of the non-pensionable cash gratuity, it states that above-inflation salary adjustments will necessitate headcount reductions. However, we think that there is limited room to maneuver here, because the bulk of civil workers are in key services. Furthermore, additional allocations have been made to provinces and aim at alleviating short-term pressure on health and education wage bills, so new variants and bouts of Covid-19 infections pose a risk of protracting these financial pressures. Finally, the Constitutional court ruling on final leg of 2018 wage agreement still poses significant risk.</p><!-- /wp:paragraph -->