OPINION | Budget 2021 – What we as individuals need to know
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 SA. This year the sentiment has been more centred on damage control rather than growth.
As at the time of the medium-term budget policy statement (MTBPS), SA was borrowing about R2.1bn 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 rein in the fiscal deficit.
Adding to this are record unemployment figures (32.5% in Q4 2020) and the expectation that Covid and its economic impact are expected to remain issues throughout the year ahead.
Explaining the big numbers
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 R213bn are among these.
As a result of a slight improvement in SA’s fiscal position compared to when the MTBPS was delivered in October, the government has decided not to impose the R40bn of potential taxes that were consider at the MTBPS.
Tax collection in 2021/22 is expected to be R1.37 trillion, up from R1.21 trillion in 2020/21. Finance minister Tito Mboweni stated that tax increases must be kept to a minimum and therefore there is no need for a “tax revolt”.
The government expects to borrow about R500bn 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 SA forecasts growth of 3.3% in 2021/22. These figures for the South African economy are dependent on the effective rollout of the Covid-19 vaccine, for which the government has budgeted R10bn (with an additional R12bn held in a contingency fund).
The finance minister stated that to achieve growth into the future SA needs to fundamentally alter the structure of the economy to be more inclusive by:
- lowering barriers to entry;
- broadening ownership titles;
- raising productivity; and
- lowering the cost of doing business.
The government is committed to R791.2bn 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 mindset 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 the 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 ongoing, he mentioned the creation of two initiatives that would spend almost R100bn on creating jobs, namely: Public Employment Programme (R83.2bn) and the Presidential Youth Employment Initiative (R11bn).
This is roughly equal to the R99.6bn increase in expected revenue for 2020/21 since the MTBPS 2020 was delivered.
The finance minister “rubbished” claims that the 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
Corporate income tax has been lowered to 27% for “companies with years of assessment” commencing on 1 April 2022. This is expected to improve SA’s attractiveness as a country to directly invest in.
Personal income tax brackets will increase by 5% (nearly 2% above inflation for 2020).
An 8% increase was levied on excise duties for alcohol and tobacco.
Fuel levies will increase by 27c per litre, with 15c allocated to the general levy, 11c to the Road Accident Fund and 1c to the carbon fuel levy.
Social grants were increased to:
- old age pension - R1,890;
- war veterans pension - R1,910;
- child care - R460; and
- foster care - R1,050.
The budget speech contained much detailed information, but summarising it for individuals, the following highlights stick out:
- the usual “sin taxes” apply (8%);
- personal income tax brackets are increasing by more than inflation (5% across the board). As this is more than inflation, this means that in real terms employees will pay less tax;
- corporate income tax is to be reduced to 27% from April 1 2022 to promote direct investment in SA;
- borrowing of about R500bn per year is envisaged for the next three years before the debt levels begin to stabilise in 2024/25;
- the government has set up two funds that are collectively worth just under R100bn to promote employment.
The question of whether 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 April 1 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 it's too late.
- Bryden Morton is executive director of 21st Century, a remuneration and HR consultancy, while Chris Blair is its leadership & sustainability CEO.