Delicate balance

Budget delivers good news, but some assumptions may prove too optimistic

The Quick Take

  • The budget is a delicate balance between fiscal constraint in areas of previous extravagance and the growing demand for social assistance
  • The baseline has improved thanks to the revenue windfall and some spending constraint
  • While short term forecasts are conservative, longer-term revenue assumptions are optimistic and inadequate provision is made for contingencies
  • The clear risk is that allocations have been made which may be difficult to scale back

Marie Antelme is an economist with 23 years of experience as a market economist.

THE BUDGET TABLED for the fiscal year 2022/23 has taken on a new character. While still focused on consolidation, it also allocates additional resources to social support and designated ‘pressure” points in need of both reform and funding. This is a delicate balance – an attempt to address a multitude of challenges and shortcomings: the fragile longer-term fiscal outlook, elevated poverty, unemployment, social distress, and acknowledgement of under-delivery on basic services to many poor households. In this regard, this budget delivers good news.

Fiscal consolidation well ahead of forecasts

Importantly, the main budget deficit will be -5.5% of GDP in 2021/22 from a recent MTBPS estimate of -6.6%. The primary deficit – revenue less non-interest spending – is expected at -1.3% of GDP from -2.3% – an important and significant consolidation, reflecting mostly revenue windfall, but also some spending constraints. Government expects to achieve a primary surplus in 2023/24, a year earlier than before, which will help slow the accumulation of debt. Relative to a year ago, the projected debt profile is much less onerous, with debt now expected to peak at 75.1% in 2025/26 and then moderate slowly. This is materially better than the peak of 88.9% estimated last year!

Revenue estimates

In total, National Treasury plans to spend R110bn more this year relative to the 2021 budget and has added R227bn to expenditure over the next three years.

The revenue needed to fund this spending comes in part from the overrun of last year’s windfall. In planning its expenditure, National Treasury estimates how much revenue it thinks it will raise over the next three years; and then in the long-term, based on growth estimates, additional taxes, and anticipated efficiency gains by SARS. In this regard, the assumptions in the budget – especially in the short-term – are conservative and leave room for an upside surprise. National Treasury estimates nominal GDP growth of just 3.6% in 2022/23 (from 6.7% in 2021/22), and 4.9% in 2023/24. Against this revenue, over-runs relative to the MTBPS baseline are expected to be R71bn in 2022/23 and R86.3bn in 2023/24. However, further out, revenue forecasts improve, implying that either stronger nominal growth or efficiency gains underpin the forecast. These have been hard to realise in the recent past.

The revenue windfall of R182bn relative to the baseline in 2021’s budget has given National Treasury a bit of room to address some of its challenges. Firstly, about half of this was allocated to limit debt accumulation, as cash balances are drawn down to finance this year’s shortfall. The social relief of distress grant extension announced by the President in February has been allocated R44bn – enough to fund 10.5m people at R350/month for a year. Strained consumers will benefit from tax relief amounting to R5.2bn and an unusual suspension of annual fuel levy increases. The employment tax incentive to support youth employment has been extended, and the President’s employment initiative has been allocated another R18.4bn over the next two years. Broadly, income support outlined in the budget should boost near-term consumption expenditure, especially amongst low and middle-income households with a high propensity to consume. 

National Treasury made a large allocation to the local governments’ share of national revenue, specifically aimed at bolstering both capacity and investment in local infrastructure. Provinces, which administer education and healthcare, were allocated funds for more teachers and health care professionals. These are all necessary functions that have faced moderating spending allocations and rising demands for services for several years.

There is reason for optimism about tax collection. Interviews with SARS Commissioner Kieswetter around the time of the budget highlighted that the institution has been rebuilding personnel capacity, that it has a new unit looking at high wealth individuals, and that Covid-19 prompted an acceleration in investment in technology and equipment. All of these are helping to close the tax gap (the amount of tax implied by current taxes, relative to what is actually filed), which widened as SARS collapsed under State Capture.


Underpinning this improved baseline are some optimistic assumptions.  

The first issue is the wage bill. After years of large real wage increases, National Treasury has fought hard to limit growth in its bloated wage bill. In this budget, cash gratuities fall away, and salary increases are limited to an average of 1,8% over the MTEF. While the outcome of the suspension of the third year of the last wage agreement is still to be decided (with a potential back-dated cost of R78bn), negotiations for the next year’s settlement will start in March.

The current compensation baseline does include an additional R17.4bn in the coming fiscal year (+2.6% y/y) which accounts for the additional expenditure allocations made this year to health and education in the provincial shares but then assumes 1.8% average wage over the next three years – implying a somewhat lower settlement going forward.

While this hardline is commendable given the cost of wages in overall medium-term expenditure framework spending (31.5%), outside of 2019, it has been impossible to achieve such a low effective increase in the past. According to National Treasury, any agreement which exceeds the allocation will have to be reprioritized or taken from the unallocated reserve (currently R25bn). This seems optimistic, although a strong-arm strategy is to be expected. This is a key underpin to the baseline consolidation, but an adjustment seems likely in this year’s MTBPS.

Social grants

Elsewhere, the R44bn allocated to the social relief of distress grant has only been made for the coming fiscal year, after which any continuation is deemed unaffordable and will require a dedicated revenue stream. Again, this needs to be balanced against the need for fiscal discipline and the need for social assistance given the massive burden of poverty amongst most of the population.


Inadequate provision is made for contingencies. Given the risks of another larger-than-expected wage agreement(s), coupled with ongoing large additions to Eskom (allocated total payments to Eskom to service its debt have been R136bn, with a further R88bn over this year and the MTEF) the provision may not be sufficient. The likely need for fiscal support to other entities remains a concern. Municipal finances were given some assistance in this budget, but the potential cost of both municipal solvency and the backlog of basic services is likely to remain large and persistent.

Eskom remains one of the biggest challenges to both growth and the fiscus. It is well understood that some solution to its large and expensive debt burden is a prerequisite for its unbundling. Standing at a total of just on R400bn (6.5% of GDP in 2021), the uncertainty associated with this raises sovereign risk premium and crowds out private investment. While the Minister noted operational and financial complexities continue to plague negotiations, this is a large and visible contingency that is not provided for.

In conclusion

The budget is an attempt to create a balance between fiscal constraint in areas of previous profligacy, the growing demand for social assistance both directly to households, and areas of “pressure” – both financial and implicitly, political. The intention is to walk a line between spending in support of growth and livelihoods, which may drive more general growth momentum as reforms are unlocked while continuing to shore up fiscal vulnerabilities. At the margin, this may be the case. However, the clear risk is allocations have been made which will be difficult to scale back, predicated on longer-term revenue assumptions that may be optimistic. Importantly, the windfall revenue which have underpinned the improved fiscal position were not more fully utilized to mitigate known risks. This may prove to be an opportunity lost.


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Marie Antelme is an economist with 23 years of experience as a market economist.

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