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The build up to this year’s budget speech has been sombre. Traditionally, this is the time of year when pundits speculate regarding what needs to be done to drive economic growth in South Africa. This year the sentiment has been more centred around damage control rather than growth. As at the time of the MTBS, South Africa was borrowing approximately R2.1 billion per day. At the same time SA’s debt to GDP ratio was 81.8% and was expected to peak at 95.3% in 2025. This places significant emphasis on the budget speech as the absence of interventions aimed at increasing revenue and decreasing costs could send South Africa over the “Fiscal Cliff”. The “Fiscal Cliff” (as defined by the Fiscal Cliff Study Group) is “the point where civil service remuneration, social assistance payments and debt-service costs will absorb all government revenue”. This is a frightening reality that we face if the budget speech does not start to reign in the fiscal deficit. Adding to this are record unemployment figures (32.5% Q4 2020) and the expectation that Covid and its economic impact are expected to remain issues throughout the year ahead.
The build up to the 2021/22 budget speech has been sombre but what do individuals need to know about the content of the speech? The Finance Minister delivered a speech which he believed would leave South Africans with ‘hope’. He quoted Desmond Tutu who said “hope is being able to see light, despite all of the darkness”. This is an apt description of South Africa’s 2021 budget speech as things are expected to take a few years to improve if all is implemented as planned.
The financial year 2020/21 saw the South African economy amass a number of unfortunate records. The budget deficit was at a record high of 14% of GDP and a tax shortfall (compared to budget) of R213 billion are among these. As a result of a slight improvement in SA’s fiscal position compared to when the medium-term budget speech (MTBS), government has decided not to impose the R40 billion of potential taxes that were consider at the MTBS. Tax collection in 2021/22 is expected to be R1.37 trillion, up from R1.21 trillion in 2020/21. The Finance Minister stated that tax increases must be kept to a minimum and therefore there is no need for a ‘tax revolt’. Government expects to borrow approximately R500 billion per year for each of the next three years before debt stabilises at 88.9% of GDP in 2025/26.
Global economic growth is expected to be 5.5%. Sub-Saharan Africa is expecting growth of 3.2% and South Africa forecasts growth of 3.3% in 2021/22. These figures for the South African economy are dependent on the effective roll out of the Covid vaccine for which government has budgeted R10 billion (with an additional R12 billion held in a contingency fund). The Finance Minister stated that to achieve growth into the future South Africa needs to fundamentally alter structure of the economy to be more inclusive by:
Government is committed to R791.2 billion in infrastructure projects. If these projects are to have the desired outcome it is imperative that “the end user pays a tariff that reflects the cost for use”. This is no doubt a reference to the 15% tariff increase that Eskom recently received. The minister further stated that South Africans need to alter their mind set of destroying infrastructure in protest. They should view this infrastructure as an “asset of the community”. In the build up to the budget speech, the rumour mill was “buzzing” with all manner of theories such as the possibility of Government reducing salaries in the public sector. This was not the case and in fact the opposite occurred. While the minister acknowledged that public sector wage negotiations were on going, he mentioned the creation of two initiatives that would spend approaching R100 billion on creating jobs, namely; Public Employment Program (R83.2 billion) and the Presidential Youth Employment Initiative (R11 billion). This is roughly equal to the R99.6 billion increase in expected revenue for 2020/21 since the MTBS 2020 was delivered. The Finance Minister “rubbished” claims that National Treasury was “swimming in cash” and acknowledged that “we owe a lot of people a lot of money”.
The budget detailed a number of new tax proposals.
Social grants were increased to:
The budget speech contained much detailed information but summarising it for individuals the following highlights stick out.
The question of whether or not this budget can be viewed as a success or a failure is debatable. If the plan is implemented in the manner in which it is intended, then history will view this address as a success. Conversely, if not enough has been done to reduce spending and increase revenue to achieve the goal of stabilising government debt at 88.9% in 2024/25 then this will be seen as a failure. In the short term, tax relief has been issued to the formally employed individuals (via tax brackets increasing more than inflation) and tax relief is intended to be offered to business from 1 April 2022. During a time when much has been made of rising debt levels and decreased revenue collection, only time will tell whether this budget is a clever part of a bigger plan or a missed opportunity to begin reducing the fiscal deficit before its too late.
Bryden Morton, B.Com (Hons) Economics, Executive Director
Chris Blair, B.Sc Chem. Eng., MBA – Leadership & Sustainability, CEO