Budget 2021: Did Treasury deliver?

Annabel Bishop from Investec, Patricia Williams from Saica, and Owen Nkomo from Inkunzi Wealth discuss the implications of the finance minister’s speech.

NASTASSIA ARENDSE: This budget feature is brought to you by Saica, the premier accounting institute that develops highly competent accountancy professionals from a functional to a strategic level of financial management.

I’m Nastassia Arendse, standing in for Nompu Siziba this evening. To dissect the budget speech even further we’re joined on the line by Annabel Bishop, who’s the chief economist at Investec, Patricia Williams who is a Saica Tax Administration Act committee member – and, of course, Owen Nkomo, who is the CEO of Inkunzi Wealth. Thank you so much for joining us.

Annabel, let’s kick off with you. From an economic point of view, and perhaps even overall, what do you make of the finance minister’s budget speech?

ANNABEL BISHOP: Hi, yes. I actually think it’s a good budget – or a better budget than markets expected. By this what we really mean is that the borrowing trajectory has dropped even lower than the consensus expectation. This is a very positive outcome, because it indicates that we are likely not to see credit-rating downgrades from the rating agencies in the first half of this year. Recall that Moody’s and Fitch both had us on a negative outlook. Of course Fitch has us on BB negative, which means that the credit rating downgrade would actually put us into a single B category. And of course after that comes the C grade and then D for default.

Obviously South Africa has been moving towards the huge crisis of eventually having a debt default or collapsed budget – sorry, cats come in finances – and of course state bankruptcy in a collapsed state. Obviously that is something which government is urgently seeking to avoid. If you read the budget review document, you’ll see a lot of commentary made to this point.

So I think from that perspective, the reduction of borrowing in our economy, which was more than the market expected, came across very positively. We saw the rand strengthen even past R14.40/dollar at one point, and then obviously bounce back. But of course we saw bond yields improve as well.

It’s certainly a more sustainable budget – but on the other hand it doesn’t actually bring down the debt levels to where they were before the Covid crisis, and not even to the debt levels of our peers, the other emerging markets and middle-income economies who saw their debt levels at 63% last year. Ours, as we know, is closer to 80%.

NASTASSIA ARENDSE: Owen, your thoughts on the budget speech?

OWEN NKOMO: An interesting budget. I think that many people out there will be calling it a “balanced budget”. They will be saying that the minister has done his best under the circumstances.

I’m extremely worried about a few things here. For example, we are not indicating the timeframes of when the major projects that the government needs to do in infrastructure are going to kick off, or be expedited so that we can start to see some of these jobs that we are expecting to create from the infrastructure spend happening. We’ve just been told a number of just over R700 billion that needs to be spent on infrastructure.

I’m extremely worried as well that over the past 10 years ministers of finance have said that “in the next two years” we will see a reduction in the debt-to-GDP ratio in the country. But in fact the opposite has happened. You can almost guarantee that the debt-to-GDP fight is one that is going to take us a long time to fight and win. I think it’s getting to extremely dangerous levels, because it just means that we’re going to continue to see interest costs increasing, which is money that should have been used to grow the economy. But we are going to keep borrowing to fund our deficit, which is quite unfortunate.

And I don’t think we’re seeing concrete ideas on how the government will reduce the civil-service wage bill. It’s been spoken about for the past three to four years, and it has not materialised in a major sort of number, which would sort of reduce the stress on government finances.

And then there’s a cancellation of the 12J mechanism, 12J tax incentive, which had created a mini-industry on its own, which as of today has come to a dead end. So that is very concerning.

And yet again we see increases in what’s going to be continued fixed high costs in the fuel pricing of the country, as well as Road Accident Fund provisions there, through these increases that came through today. So that’s certainly is a big challenge with very limited scope and ideas. When are we going to widen the tax base of the country?

NASTASSIA ARENDSE: Speaking of tax, Patricia, were there any surprises for you from a tech side of things?

PATRICIA WILLIAMS: Well, I think that for most of us the tax announcement ticks a lot of boxes. For example, we had no personal income tax increases and, in fact, the tax brackets were shifted to give bracket-creep relief to people. That was quite positive.

And the continued strategy to decrease certain of the allowances …… while at the same time bringing down the corporate tax rates. So we’ve got the announcement that the corporate tax rate will decrease next year after these incentives have been phased out a little bit.

Apart from not raising the R5 billion that was originally announced for this year, there was originally an announcement of R40 billion of tax increases over this year and the next three. And the government has gone so far as to cancel all of that, which is showing a lot of confidence in the ability of Sars to improve collections through enforcement. I must say, from the Tax Administration Act side, which is disputes in dealing with Sars, I was very pleased to see Sars being given a suitable budget to modernise and improve their collection processes.

NASTASSIA ARENDSE: Annabel, given the way that the budget speech was received, from a market reaction point of view, the rand initially strengthened and even the bond market started acting positively. Even though there were all these notes of hope, were there any key risks or overly optimistic assumptions or perhaps even potential weaknesses that might point to an extremely challenging path ahead for the country?

ANNABEL BISHOP: I would say straight off you can’t …… economic growth. I mean, I don’t think that running a country at 2-3% – and by that we actually say it in reverse, the sentiment back down to 2% and then below 2 – is actually something which is not highly risky. And, given South Africa’s environment that we’re sitting in, we are at the senior lower debt trajectory, but it doesn’t actually mean we’ve seen sufficient lowering of the debt trajectory. So, if you look at the peak, which is at 90% now instead of 95%, if you will, of GDP in 2025/26, that does not take you very far away from the 100% mark. Because, if you add in the state-owned entities debt, the SOEs’ debt that is guaranteed by the state, that portion of the contingent liabilities, it actually takes your total country debt to still close to 100%. That’s very high for an emerging-market economy.

The risk is that is still not seen as sustainable. Of course, one of the reasons why we have such low credit ratings, the reality, is that we are finding ourselves at such a weakened fiscal position still. A lot of it is due to Covid, but not the bulk of it. The bulk of it is actually due to the weak fiscal position in the fourth [quarter]. I think it’s going to take many years to wind this down and, sadly, if we have any other type of crisis, or if we have anything go wrong – luckily things are going right at the moment for the public sector wage bill – then obviously we find ourselves in a very risky predicament. You know, it’s very good that the courts have ruled in favour of government from the government finance perspective for the public sector wages. Of course they have said that it has accounted for 54% of spending, which is just not sustainable.

The reality of the situation is that the Constitutional Court has ruled in favour of National Treasury as well and they’ve accepted the argument that the original agreement was invalid and unlawful, and they referred to National Treasury’s constitutional role in safeguarding public finances. That doesn’t mean the unions haven’t stopped trying to fight this, and obviously disrupt the environment as well.

But I think mainly for me the big risk is still achievement of these estimates, and in fact they are …… deteriorated and government actually needs to kind of do better than this if we don’t want to see further credit-rating downgrades. Remember, those are predicated on where you are. They’re not necessarily predicated on where you’re going to go in the future. So if we do actually get to the 100% of GDP from a debt perspective we will probably see lower ratings.

NASTASSIA ARENDSE: Owen, you spoke about a debt-to-GDP fight that we continue to lose, and another fight that I suppose could be looming relates to this public-sector wage bill that Annabel touched on a little bit there. From your perspective, what do you think the success of this budget will hinge on?

OWEN NKOMO: It’s going injure its implementation of some of these things that the minister is saying they’re planning to do. For example, I mentioned earlier that with infrastructure spend of over R700 billion there still seem to be a lot of problems with the implementation of these things. Government doesn’t carry through all these projects timeously and the result is they’re going to cost more than they are budgeted to cost. We’ve seen it too with the World Cup stadia and how much they ended up costing the country.

These big projects, if they’re not handled well, are going to end up costing the government a lot of money. We spoke about slippage in the government expenditure through corruption. Some people are saying probably R100 to R200 billion has been lost to that kind of …….

So, if we don’t control how these public funds are used for infrastructure implementation, we are going to lose a lot of cash as well.

I think that the one problem or two problems that the government really has to make bold steps about is to really engage the unions that should present government employees to say, you know, we need to rationalise our resources, or these workforce plans for government employees need to be revisited. We need to …… This wage bill is just too much, and it’s costing us quite a lot of cash.

And I think we need to be brave enough to face the issue of our debts. Like Annabel has just been saying, when you start to get your debt-to-GDP ratio going to 100%, we’re going to get more downgrades. I must say that the downgrades we’ve experienced so far haven’t really made things difficult for the country’s leaders, and to an extent to South Africa’s corporates, because they seemed to not have had that much impact in terms of people’s ability to get funding. But you don’t want it to get to 100%, because it might just start to have an impact on the country. And then having a deficit of 14%-odd is another big issue that I worry about.

And I think we also continue to do things that in my view should be done by socialist states, where we are overextending a budget that hasn’t got enough support to do a lot of the social stuff, instead of taking that budget and pushing and creating an environment where entrepreneurs can create jobs. We saw unemployment yesterday at 32%-plus, and we know it’s higher than that.

So I’m worried about those things and worried about social unrest coming through if we don’t manage our finances properly for an extended period of time.

NASTASSIA ARENDSE: Patricia, the role of tax incentives – Owen was talking about the Section 12J incentive that is coming to an end in June. [What is] the role of tax incentives, when it comes to having a tax policy that is able to achieve its plans and objectives, given the comments that came out of the speech regarding some of these incentives?

PATRICIA WILLIAMS: The problem with tax incentives is that they often don’t work out as planned. There has been some research that suggests that it might be better for South Africa to have a lower corporate tax rate and remove these individual tax incentives. And then, by having the lower corporate tax rate, one is already attracting investment into the country. So that’s the path we on at the moment. I personally feel quite comfortable with that, and would prefer to see that kind of cost.

I think the real kind of losers on the tech side at the moment would be the tobacco and alcohol industry, because they suffered tremendously with the ban. It was commented on that there was a lot of lost revenue to the fiscus because of the failure to collect excise duty during the bans on alcohol and tobacco. But now those are the very taxpayers who are facing double inflationary increases on excise duties. So those would be, I think, the losers the Saica people are feeling. This was more concerned with …… given the tremendous employment prospects in the similar sectors.

NASTASSIA ARENDSE: All right, let’s leave it there. Thank you so much for your time. That is Annabel Bishop, who spoke a little bit earlier, chief economist at Investec. And you just heard the voices of Patricia Williams, who is a Saica Tax Administration Act committee member, and Owen Nkomo, who is the CEO of Inkunzi Wealth, helping us dissect the budget speech even further.

This budget feature was brought to you by Saica, the premier accounting institute that develops highly competent accountancy professionals from a functional to a strategic level of financial management.

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