Something for everyone in budget buffet

The 2023 budget can be viewed as an Eskom budget by necessity

Economists are among a select group who have the opportunity to obtain budget documents before everyone else — under lock-up, embargo and strict rules — to afford them the time to read and analyse the country's finances.

There is no contact with the outside world until the minister of finance has tabled the budget in parliament. The National Treasury offers breakfast and lunch packs, which over the years have had a striking correlation with the main issues of the budget. 

This year, the lunch pack had lamb, two pieces of chicken, a sausage, calamari, some vegetables and a starch. That’s a proper buffet if you ask me. So was the budget — it tackled the long-standing Eskom debt takeover and still provided relief and incentives to households and businesses in an environment that is increasingly dominated by pessimism.

Let’s acknowledge the economic backdrop against which this budget was drafted. The Treasury was confronted by the strongest headwinds since the recovery from Covid started. The commodity boom that drove a surge in mining and financial sector profits and associated tax revenues is moderating. The global and domestic economies are still facing a cost-of-living crisis that is threatening social stability. Global central banks continue to hike interest rates, though by smaller margins, raising the cost of debt for households, corporates and governments.

Given these headwinds, global economic growth is expected to be weaker at 2.9% in 2023, compared with a previous forecast of 3.4%. The US, the UK and euro area are all expected to moderate significantly. South Africa’s growth is seen as moderating to 0.9% in 2023 before rising to 1.5% in 2024 and 1.8% in 2025.

South Africa has a unique additional constraint of load-shedding, which is decimating small businesses and imposing large costs on the economy.

Eskom spokesperson Sikonathi Mantshantsha reported this week on Twitter that Eskom had a shortage of more than 7,000MW, which implies stage 7 load-shedding. The 2023 budget can be viewed as an Eskom budget by necessity.  

The budget provides clarity on the long-awaited Eskom debt solution, where the government will settle Eskom’s debt of R254bn and interest over three years — about R168bn in capital and R86bn in interest — to enable the utility to focus on investment in transmission infrastructure and maintaining its ailing power plants.

There are some conditions attached, which are all well thought through, but the question is what happens if the utility does not meet these conditions?

We have been here before and we learnt that Eskom is too big to fail, so, until there are adequate alternative energy providers, the conditions are flexible. A different view, expressed by professor Raymond Parsons of the University of North West Business School, is that in its current form Eskom is too big to survive, which brings me to my next point.

On the demand side, the Treasury has provided incentives for households and corporates to invest in renewable energy. Households will be able to claim 25% of the cost of solar panels in taxes, limited to a maximum of R15,000, with the total budgeted value of R4bn. While this is great, I was disappointed that this is only applicable to solar panels and not to inverters and batteries.

There is a need to limit the revenue leakage of incentives, and there is an argument that the poor will not benefit as they cannot afford solar. The counter to this is that we need everyone who can generate power to do so — be self-sufficient and if there is surplus, feed into the national grid. The poor can get electricity from those with surplus energy once it is connected to the grid.  

The biggest incentive is that businesses will be able to reduce their taxable income by 125% of the cost of investing in renewable energy beginning March 1, with no limits on the size of the projects.

The total incentive to business amounts to R5bn, which appears to be too little. What would happen if this was increased tenfold; how much energy would come from private businesses and what would be the benefit relative to the cost?

The Treasury was smart enough in the 2022 medium term budget policy statement to extend the social relief of distress (SRD) grant to March 2024 and not much was said about it in this budget, although it was emphasised that any future commitment to unfunded expenditure will need to be financed either by reprioritisation or an increase in tax rates.

Unfortunately, expenditure has already been cut to the bone and there is nothing more to cut that will yield enough to fund new spending. The SRD is not budgeted for beyond March 2024, which presents a risk to the fiscal consolidation measures given that 2024 is an election year and politicians outside the Treasury may be tempted to be populist to entice voters.  

Like the lock-up lunch packs, the budget had something for everyone. There was adjustment for fiscal drag for individual taxpayers amounting to R15.7bn and a further R4bn from not adjusting the fuel levy. Grants have also been adjusted for inflation to preserve the buying power of the poor.

The South African Revenue Service, the police, the National Prosecuting Authority and the Special Investigating Unit were all given more funding to implement state capture commission recommendations.

The budget addressed the biggest elephant in the room, which is Eskom’s debt, offered solar power incentives to reduce reliance on Eskom, provided relief to households and bolstered the institutions that are critical for law enforcement and tax revenue collections.