Even the usually jovial Minister of Finance Tito Mboweni turned serious very quickly during his budget speech today. Still making a quick tongue-in-cheek comment every now and then (we can never be sure exactly at who those are aimed, but they make us grin in any case), the minister’s reasons to be hopeful, were perhaps overshadowed by the reality of the dire position of our public finances.
In the run-up to the speech, most commentators agreed that having to come up with the budget was a very unenviable task and that we should be prepared to be disappointed. We dare say that he probably did as well as anyone could have expected, perhaps even surprising to the upside here and there.
Some mind-boggling numbers
Real GDP is expected to grow by 3.3% in 2021 and then taper off to 2.2% in 2022 and 1.6% in 2023.
Treasury expects a budget deficit of 14% to GDP in 2020/21 due to the pressures of Covid-19. Consolidated spending will reach around R2 trillion each year over the medium term, with the bulk of this allocated to learning and culture, social development and health. More than R10 billion has been allocated to the purchase and delivery of Covid-19 vaccines over the next two years.
Government’s borrowing will remain well above R500 billion per year in the medium term with gross loan debt to increase to R5.2 trillion in 2023/24. On balance, Treasury estimates that it is on track to return to a budget surplus in 2024/25 after which debt is expected to stabilise at 88,9% by 2026 (80.3% in 2021).
Where will the money go?
Shifting to economic reforms, the importance of infrastructure development was highlighted with the minister confirming a R791.2 billion infrastructure investment drive, in partnership with the private sector and “other players”.
Further to the R83.2 billion that was made available for public employment in the August Special Adjustments Budget, another R11 billion has now been allocated to the Presidential Youth Employment Initiative bringing the funding for employment creation to close to R100 billion, specifically targeting the employment of young people.
Government plans to finalise 1 409 restitution claims at a cost of R9.3 billion over the next three years to achieve redress and equitable access to land.
R4 billion has been allocated to the development of township and rural enterprises, which will include finance initiatives.
Focus on taxes
Treasury expects to collect R1.21 trillion in taxes during 2020/21, which is about R213 billion less than budgeted. This is the largest tax shortfall on record.
Against this backdrop, we were pleasantly surprised by the reduction in corporate tax to 27% for years of assessment commencing from 1 April 2022. There will be some limitations on corporate interest deductions and assessed losses carried forward, but any reduction in tax, even only 1% is positive at this point. Perhaps this pre-broadcast of a lowering in tax that really only applies one tax year out, was a small way of manufacturing that hope that we all need at the moment.
Personal income tax brackets will be increased by 5%, which is above the published inflation rate, with the tax burden mostly reduced for lower- and middle-income households. This was one area in which we thought the minister would have no choice but to increase taxes, but by his own acknowledgement, he realised that he was facing a potential tax revolt if he did.
There was no surprise however in the increases in sin taxes, with the cost of a 750ml bottle of spirits increasing by as much as R5.50 with immediate effect. The price of a packet of 20 cigarettes will increase by R1.39. This all due to an 8% increase in excise duties on alcohol and tobacco.
Fuel levies will increase by 27 cents per litre.
Tax collection and enforcement
During the coming year, Sars will be dedicated to improving collections from wealthy individuals with complex financial arrangements. To this end, it is expanding its specialised audit and investigative skills in the tax and customs areas to renew its focus on the abuse of transfer pricing, tax base erosion and tax crime. The first group of targeted individuals can expect communication from Sars in April! We feel that the enforcement and collection of existing taxes is a much more effective step towards fiscal stability than increasing the tax burden on already thinly stretched taxpayers and we will be watching this initiative with keen interest.
What fell short?
We didn’t get quite enough confirmation that the prevention of corruption in government procurement processes (not only PPE related) is on track. While many other successful prevention initiatives were mentioned, we would have liked to know that the government is focused inward first and foremost when it comes to corruption.
We felt that more than the cursory mention that support to state-owned entities will be done in line with the medium-term budget and a new allocation of R7 billion to the struggling Land Bank, would have gone a long way to creating confidence.
The amendment of Regulation 28 of the Pension Funds Act (the regulation that governs how retirement funds may be invested) is also a source of great concern to the public and the quick mention that Treasury merely seeks to make it easier for retirement funds to increase investment in infrastructure, did nothing to allay our nerves. The proposed amendments will be published for public comment “this week” – watch this space for more information.
Lastly, the minister did well to steer clear of the elephant in the room – the public sector wage bill. This takes the biggest bite out of the apple by far and has long since been fingered to be at the core of our fiscal problems. There was mention that “Minister Senzo Mchunu, is working with our partners in organised labour to achieve a fair public-sector compensation dispensation when negotiations on a new multi-year wage settlement begin later this year,” but you can’t blame us for having hoped there would be more said on this topic. For now, we will have to take comfort from our favourite quote from the speech:
“…getting our fiscal house in order is the biggest contribution we can make to support our Economic Reconstruction and Recovery Plan… We remain adamant that fiscal prudence is the best way forward. We cannot allow our economy to have feet of clay.”
For the full speech, and various explainers, visit Treasury’s website here.