Budget Speech 2022: A focus on business
Date: Feb 23, 2022 | School of Economics and Econometrics
Prof Peter Baur takes a closer look at the 2022 Budget Speech
There is pronounced recognition of the devastating situation regarding the South African economy. Recognising that debt to GDP ratio is a serious concern, and costs South Africa a huge amount of money each year. At times when tax income is most needed, South African economy is stifled by low levels of economic growth, the social dependency burden and climbing unemployment.
Concerns, the expansionary fiscal policy proposed may have a strong inflationary impact. Especially as there is an initiative to encourage more loans from formal banking structures and other money lenders. The money lending sector will be underwritten (guaranteed) by government, and this in itself may make loans somewhat easier to acquire, especially for business, but possible risk may occur as strengthening this sector of the economy will possible create an inflationary element and may be difficult to manage. Such loans may increase the overall money supply and have implications for the value of the South African Rand going forward. There is a possible chance that such an initiative may be inflationary in nature, and may be met soon with an interest rate increase to mitigate against the inflation. An increase in interest rates may see capital inflows increase into South Africa.
Households will be somewhat protected by no direct change in income tax (PAYE), and by leaving VAT unchanged will not alter household spending patterns too much. Sin tax increase are focused more on higher income households, but may promote the informal trade of certain goods such as cigarettes and alcohol. Households are extremely vulnerable, and with the high unemployment, social distress may be a growing concern. Another point is that an increase in sin taxes may not reduce household consumption of tobacco and alcohol. However, the spending pattern of households may change, given their limited income.
Policies towards addressing accountability, mitigating against corruption send a positive message to the business sector, and also may support investor confidence. The huge loan to Eskom, to cover the debt, with a repayment plan may put incredible upward pressure on future energy prices, but at the same time make it more profitable for private energy generators to enter the market. This may have an impact by possibly increasing the cost of business and household spending in the future.
A final concern is that the volatile international market may put upward pressure on household and business costs. This is already evident in the increasing inflation as seen in the EU region and America. These are also two of South Africa’s largest trade partners. Cost push inflation is a real concern. The possible Russia-Ukraine conflict is another concern, and little mention was made to address the uncertainties South Africa may face due to this in the next 12 months. International investor uncertainty may make the emerging economies an attractive alternative investment, especially South Africa. As I mentioned, addressing factors such as fiscal accountability and rooting out corruption are a positive message.