Prepare for difficult price negotiations with public sector clients
The postponement of tax increases to 2023 will offer relief to all MNCs in terms of pressure on their margins and customer purchasing power. However, companies selling to the public sector and SOEs face weak demand conditions over the coming year because of tightening budgets for the procurement of goods and services. MNCs should ensure their goals and assumptions reflect squeezed public finances and prepare for difficult price negotiations with public sector clients. MNCs should also invest in business development capabilities to ensure they can capture emerging demand opportunities stemming from new infrastructure investment.
The government’s 2022/2023 budget, unveiled on February 24, sees planned expenditure rise by a meager 3.8% YOY, which is tantamount to a real-terms cut because it is below the forecast inflation rate of 5% YOY in 2023. Recurrent expenditure priorities will focus heavily on continuing emergency poverty alleviation measures, boosting hospital funding to address COVID-19-related backlogs, and bailing out provincial governments struggling with funding shortfalls. Infrastructure investment continues to receive the most generous increases of all functions because of the government’s desire to boost economic competitiveness. Tax hikes have been largely avoided, and companies can look forward to a one percentage-point reduction in corporate tax from 2023 (although the government plans to clamp down on tax avoidance). Increases to fuel levies have been suspended, softening the impact of rising global oil prices, while personal income taxes remain largely unchanged, offering a lifeline to consumers facing rising costs of living. Excise duties on alcohol products will rise by a modest 4.5% compared to 2021.
The government will likely meet—and possibly exceed—its revenue targets in 2022, largely because the Ukraine crisis is expected to positively alter its fiscal assumptions. The treasury stands to benefit from rising tax receipts from the mining industry owing to surging global prices for South Africa’s commodity and metal exports, namely iron ore, coal, gold, platinum, and palladium. However, this windfall is unlikely to result in a substantial spending boost given the country’s high public debt (72.4% of GDP), large budget deficit (-6% of GDP), and high debt servicing costs (14% of total government spending). This is overlaid with a longstanding policy aim of avoiding further credit rating downgrades, achieving a primary surplus by 2024, and stabilizing gross public debt as a percentage of GDP by 2025. Consequently, rather than boosting spending, over the coming year, the government is expected to go beyond its current plans to further delay tax increases, avoid civil service redundancies, and postpone the removal of emergency COVID-19 welfare payments into 2023.
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