Will Godongwana’s budget show commitment to Ramaphosa’s priorities?

Minister of Finance Enoch Godongwana must use the priorities of the State of the Nation Address and focus Wednesday’s budget on that which will grow the economy and create jobs in real terms.

This he could achieve by allocating more funds to manufacturing and production, that includes multiple industries as diverse as the automotive industry, chemicals, electronics, healthcare and textiles.

Godongwana must ensure commitment to the priorities of President Cyril Ramaphosa to realise miracle growth. The chief cause of South Africa’s deteriorating public finances is that the economy is barely growing and recently the pandemic has wiped out businesses that were expected to contribute through corporate income tax and sustainable job creation.

Strengthening the macroeconomic framework to deliver certainly and accountability – and managing government debt to GDP at reasonable levels – is essential for economic development and recovery. South Africa’s macroeconomic fundamentals have weakened and vulnerabilities have increased. Covid further worsened the fiscal position in 2020 and last year.

State-owned enterprises’ (SOEs) operational and financial performance have deteriorated and government debt to GDP is estimated to have reached almost 94 to 100% of GDP this year. Private investment could gradually pick up as Covid related uncertainty eventually moderates.

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In the medium term, growth is projected to ease to 2.4% this year, capped by structural constraints to investment, prevailing policy uncertainty, the elective conference and elevated government debt, which will hinder job creation.

Godongwana is expected to allocate a higher percentage of the budget to economic development, covering special economic zones (SEZs) for agriculture and agroprocessing, light and heavy manufacturing, technological advancement and infrastructure development projects that can boost economic growth, economic development and job creation.

The second-highest percent must be allocated to service government debt to GDP, which ranked higher on the 2020 and 2021 budget allocation. The minister of finance is not expected to increase corporate income tax and personal income tax in 2022. The SEZ programme is aimed at attracting foreign direct investment (FDI) to increase

firm-level investment and improve firm-level productivity by enhancing firm-level coordination, networks and innovation. The effectiveness of tax incentives for both foreign and domestic investment deserves special attention.

The estimates indicate that export-oriented investments (by multinational corporations) are particularly sensitive to host countries’ taxation, that this sensitivity appears to be greater in developing countries than in developed countries – and that this sensitivity becomes even more significant over time. The objective of the SEZ policies is to attract foreign direct investment to drive growth.

Therefore, it is expected that the minister will review and align tax incentives to investors interests as SEZs main goal is to attract foreign direct investments through lower tax incentives and other infrastructure benefits to investors, and that will enable the SEZs to create jobs.

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Trends in FDI flows tend to reflect the level of confidence investors have in political and economic conditions within South Africa. Within limits, this can therefore serve as a barometer of South Africa’s perceived stability, both in political, economic and social terms, and to what extent it is believed that governments and investors have the capacity to manage the potential risks.

Godongwana must give assurances to the nation on the South African debt restructuring mechanisms and the agreed revised repayments terms, as the International Monetary Fund has expressed concern that South Africa’s outlook remains precarious.

Godongwana is expected to allocate to a balanced energy mix and state-owned enterprises. It would also be stunning to hear the post pandemic economic strategy for a state-owned bank and sovereign wealth fund.

• Mkhabela is chief executive and chief economist at Antswisa Transaction Advisory.