Inflation's ripple effects: A closer look at Budget 2023

In February last year, Treasury estimated that CPI inflation would be 4,8 percent. By October, it was predicting 6,7 percent. StatsSA reported  6,9 percent inflation in 2022.

Jones Gondo, a senior credit strategist at Nedbank, explains that this underestimation will likely result in more tax revenue and help to keep down the debt-to-GDP ratio. It will also render the government's spending plans unrealistic.

What inflation means for tax revenue

"Higher inflation is causing tax revenue to also be inflated," says Gondo.

 Goods cost more, resulting in more VAT. Rising salaries leads to higher income tax, especially as tax brackets have not kept pace with inflation.

Nedbank estimates total revenue for 2022/23 to be R8.2 billion, or 0.4 percent more than October’s Medium Term Budget Policy Statement (MTBPS) estimate.

This is despite real GDP growth (which discounts for inflation) coming in lower than forecast for 2022, largely due to the electricity crisis. 

"What matters is that nominal GDP, still is higher than what they forecast," says Gondo. Nominal GDP, which measures economic growth without discounting for inflation, is higher than predicted. 

Inflation brings down debt-to-GDP

Nominal GDP is also the measure used as the denominator in the Debt-to-GDP ratio.

Gondo explains that as long as nominal GDP grows faster than the debt, the ratio will decrease.

National Treasury acknowledged this effect in the 2022 MTBPS stating, "This [debt-to-GDP stabilisation] is mainly driven by higher nominal GDP projections, resulting from higher inflation, and an improved primary balance given better than expected revenue estimates. These factors outweigh the adverse impact of higher interest rates and a weaker exchange rate."

 However, higher-than-expected inflation also places pressure on the Treasury's spending plans. 

Unrealistic spending plans 

"We think expenditure is going to be much higher than predicted in MTBPS," says Gondo. A core reason is that government estimated in the MTBPS that the public sector wage bill grow by 0,4 percent in the next year and an average of 3,1 percent over the medium term.  

The Public Servants Association (PSA) is calling for a 12,5 percent increase and reportedly will serve a seven-day strike notice on the same day as the Budget speech. 

Across functions, government spending has not kept pace with inflation. Previous reporting on municipal finances illustrates how this increasingly strains service delivery.

"And then also you've got the SOE bailouts waiting in the wings," says Gondo. 

The market wants certainty regarding Eskom's debt

"We're not expecting fireworks in the bond market," says Gondo. However, markets may react negatively if there is a lack of detail about how Eskom's debt will be managed. 

The government announced in October that it plans to take over a portion of Eskom's R400 billion debt burden to allow the utility to restructure.  

"If they kick the can down the road again, it just means that we will have to wait for another event or day for an announcement. At that later point, there might not be enough space in the budget to do this thing [taking on Eskom's debt] that they want to do. 

"People want the details now."