Budget 2023 Highlights
By Michael Kruger, Senior Investment Analyst and Shane Packman, Senior Associate Investment Analyst, Morningstar Investment Management South Africa
On 22 February 2023, Finance Minister Enoch Godongwana delivered the annual budget speech, providing an update on South Africa’s finances.
Minister Godongwana had a challenging balancing act as the country continues to face a combination of headwinds including sluggish economic growth, a high unemployment rate, rising debt levels, and frequent power outages.
Eskom and energy in the spotlight
The electricity crisis and its impact on economic growth took centre stage in this year’s annual budget. The 2023 budget was geared towards reassuring foreign investors, providing support to a struggling consumer base (as inflation has moved higher), reducing unemployment, and simultaneously striving to stimulate economic growth.
According to Minister Godongwana, “The lack of a reliable electricity supply is the biggest economic constraint.”
The government will provide Eskom with a major debt relief arrangement of R254 billion over the next three years, consisting of R168 billion in capital and R86 billion in interest. The Eskom Debt Relief Bill will be used to affect this balance sheet transaction. The aim is to strengthen the utility’s balance sheet so it can restructure and make the necessary investments and maintenance to ensure a secure electricity supply. It was refreshing to see the reigns being pulled tighter for Eskom, with the relief being accompanied by strict conditions.
Some key aspects to consider that have affected spending potential and therefore, economic growth:
- Prolonged power cuts and the deterioration of port and rail infrastructure continue to hinder economic growth.
- Locally and globally, economic growth has slowed. Low economic growth leads to lower tax revenues and increased requests for fiscal support.
- Unemployment remains high.
- Rising borrowing costs (to tackle elevated inflation) place the consumer under pressure.
- Inflation has increased to 6.9% – placing increased pressure on low-income bracket tax earners.
- The slow implementation of structural reforms has lowered business confidence.
- The emigration of highly skilled workers has continued.
Revenue, deficits, and debt to GDP according to the 2023 budget
As highlighted by Minister Godongwana, South Africa is reaping the benefits of a more efficient and effective tax administration system, that is building trust to increase voluntary compliance and boost revenue collections. New initiatives will provide tax relief of R13 billion.
Source: National Treasury “Budget highlights”. Data as published on 22 February 2023. For illustrative purposes.
- Tax revenue collections for 2022/23 are expected to total R1.69 trillion. This exceeds the 2022 Budget estimate by R93.7 billion, and the 2022 MTBPS estimate by R10.3 billion.
- Over the medium term, revenue projections are R6 billion higher than the estimates of the 2022 MTBPS.
- Income and profits proved to be more resilient than anticipated, with collections from mining remaining robust due to elevated (although declining) commodity prices.
- Higher revenue collection from personal income tax (on the back of a recovery in earnings and employment levels).
- Value-added-tax refund payments offset robust growth in import VAT.
- Government debt has reached R4.73 trillion and is projected to rise to R5.84 trillion over the medium term.
- Debt-service costs will rise from R307.2 billion in 2022/23 to R397.1 billion in 2025/26.
- The consolidated budget deficit is projected to narrow from 4.2% of GDP in 2022/23, to 3.2% of GDP by 2024/25.
- The debt ratio will stabilise at 73.6% of GDP by 2025/26 (which is 3.6% higher than projected in the MTBPS – due to the Eskom debt relief).
Below is a quick overview of some of the key updates announced in the budget speech:
Solar Tax Incentive
To boost electricity generation, the government is proposing a rooftop solar incentive program to encourage individuals to invest in solar Photovoltaics (PV). Under this program, individuals will be eligible to receive a tax rebate equal to 25% of the cost of any new and unused solar PV panels, provided that the panels are purchased and installed at a private residence, and a certificate of compliance for the installation is issued between 1 March 2023 and 29 February 2024.
The rebate is exclusively applicable to solar PV panels and does not apply to inverters or batteries, to focus on increasing electricity generation. The rebate can be utilised to offset an individual’s personal income tax liability for the 2023/24 tax year, with a maximum limit of R15,000 per individual. For instance, an individual who acquires 10 solar panels worth R40,000 can lower their personal income tax liability by R10,000 for the 2023/24 tax year.
Expansion of the renewable energy tax incentive
To encourage private investment in renewable energy and address the energy crisis, the government will temporarily expand the existing tax incentive available to businesses. The current incentive enables businesses to deduct qualifying investment costs over a one- or three-year period, with deductions ranging from 50% to 100%. However, under the new plan, businesses investing in renewable energy projects can claim a 125% deduction in the first year, with no generation capacity limits. This expanded incentive applies only to new investments between 1 March 2023 and 28 February 2025. For example, a R1 million renewable energy investment would qualify for a R1.25 million deduction, reducing a company’s corporate income tax liability by R337,500 in the first year.
Retirement fund taxation and reform on the cards
The retirement tax tables for lump sums withdrawn before retirement, and for lump sums withdrawn at retirement, will be adjusted upwards by 10%. This means that the tax-free amount that can be withdrawn at retirement increases to R550 000.
Following extensive public consultation, the first phase of legislative amendments to the retirement system is due to take effect on 1 March 2024. These amendments intend to enable pre-retirement access to a portion of one’s retirement assets while preserving the remainder for retirement. Retirement fund contributions will remain deductible up to R350 000 per year or 27.5% of taxable income per year – whichever is lower. Permissible withdrawals from funds accrued before 1 March 2024 will be taxed according to the lump sum tables. Withdrawals from the “savings pot” before retirement will be taxed at marginal rates. On retirement, any remaining amounts in the savings pot will be taxed according to the retirement lump sum table (for example, R550 000 is a tax-free lump sum on retirement).
- Ensuring a stable macroeconomic framework to create a conducive environment for savings, investment and growth.
- Implementing growth-enhancing reforms in key sectors, particularly in energy and transport.
- Strengthening the capacity of the state to deliver quality public services, invest in infrastructure and fight crime and corruption.
South Africa has experienced multiple shocks in recent years, leading treasury to continue to adopt a consumer-oriented budget. The National Treasury has been faced with the challenging task of balancing the need to increase tax revenue with supporting struggling consumers, all while dealing with significant power supply constraints. In response to these challenges, the National Treasury presented a budget with a focus on reducing Eskom’s debt and promoting clean energy through solar incentives. The budget also included no increase in the fuel levy and positive adjustments to tax thresholds, while government expenditure increased by only 3.4%.
The primary objective of the government is to continue to generate employment opportunities, sustain the growth of the South African economy, and maintain low levels of government spending. If the gains are to be sustained, future budgets should prioritise prudent fiscal management and carefully considered trade-offs.
This commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past
performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back
the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. The information, data,
analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort
has been made to ensure the accuracy of the information provided, but Morningstar Investment Management South Africa (Pty) Ltd
makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be
superseded by any subsequent versions of this commentary. Except as otherwise required by law, Morningstar Investment
Management South Africa (Pty) Ltd shall not be responsible for any trading decisions, damages or losses resulting from, or related
to, the information, data, analyses or opinions or their use.
This document may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”,
“estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially
from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for
Morningstar Investment Management South Africa Disclosure
The Morningstar Investment Management group comprises Morningstar Inc.’s registered entities worldwide, including South Africa.
Morningstar Investment Management South Africa (Pty) Ltd is an authorised financial services provider (FSP 45679) regulated by
the Financial Sector Conduct Authority and is the entity providing the advisory/discretionary management services.