Industries and business have responded with mixed reviews to the Budget Speech delivered by Finance Minister Tito Mboweni on February 24.
Industry organisation Business Leadership South Africa (BLSA) posits that it showed the fruits of a better-than-expected economic recovery and tax collection over the past several months.
Moreover, it acclaims the modest tax relief that has been provided to individuals and companies, which it says will go far to support the economic recovery.
BLSA highlights that a key challenge for Mboweni has been to build credibility in government’s finances. It says that improved revenue collection means government will be able to stabilise the debt load sooner.
“Overall, this will support business sentiment which has suffered over concerns about fiscal sustainability, though it remains highly vulnerable to any slippage in spending,” BLSA notes.
The budget deficit has been revised to 14% of gross domestic product (GDP) in 2020/21, which BLSA says is still too high, but is an improvement on the 15.7% deficit expected in the Medium-Term Budget Policy Statement (MTBPS) last October.
Gross debt is also somewhat better than the 81.8% of GDP expected in October, declining to 80.3% of GDP for 2020/21, it notes.
It further states that the tax relief for individuals will help consumer spending, while tax relief for companies leaves more capital in their hands to invest.
BLSA also says it looks forward to engaging with the National Treasury on revisions to the public-private partnership (PPP) framework in a workshop being planned for March.
“We hope this will enable a greater pipeline of infrastructure projects that move beyond the prefeasibility and conceptual stage listed in the Budget Review,” the organisation says.
BLSA also welcomes the confirmation of the March 2022 deadline to switch from analogue television broadcasts to digital, noting it will free up spectrum to meet demand and reduce the cost of digital communications.
Financial services provider Citadel chief economist Maarten Ackerman comments that while there are notes of hope, the Budget also demonstrates a number of key risks, overly optimistic assumptions and potential weaknesses, pointing to an extremely challenging path ahead for the country.
First, he mentions that GDP figures have come in slightly better than hoped for in October last year, showing a contraction of 7.2% for 2020/21 rather than a more than 8% contraction expected in October.
The National Treasury has also conservatively forecast 3.3% growth for the year ahead, with growth to moderate to 2.2% for 2022 and 1.6% for 2023.
“While we did expect a better number than usual for this year, coming off the exceptionally low base of -7.2% in 2020, it was really hoped that, with the right reforms, we could pave the way for stronger growth in the longer term. It is clear, however, that after a rebound in 2021, we are expected to drift back below 2% in 2023.
"This is enormously frustrating, as with the correct reforms we should really be able to kickstart the local economy. The muted 1.6% figure for 2023 is a number that we had become used to over the last five or so years, but given that it is in line with population growth, it will do nothing to fix our unemployment issues or the other socioeconomic problems that the country is facing,” Ackerman says.
He also highlights another positive as the over-recovery of almost R100-billion.
Better-than-expected revenue means that the budget deficit has come in at 14% of GDP for 2020/21 instead of 16%. This is then expected to decline to 9.3% in the next year, and to 6.3% by 2023/24, Ackerman point out.
“However, these numbers are compared to last October. If we compare them to last February, the tax shortfall is north of R200-billion which is the largest tax shortfall on record. This places some of the positives into perspective and highlights that the road ahead remains very steep,” he cautioned.
“It is further crucial to recognise that the projected budget deficit figures have been reached by pencilling in flat expenditure numbers for the next four years, using highly optimistic assumptions regarding cutbacks and reprioritisations in government spending. As many of these cutbacks seem to rely on the ability to freeze government wages in order to reduce the pressure of the public sector wage bill, there is still a significant risk to achieving the projected figures,” he adds.
Debt-service costs are conservatively expected to approach 21% of tax revenue, which Ackerman says means that South Africa is far from out of the woods in terms of risking a debt spiral.
He notes other positives being that corporate tax will be lowered to 27% from the beginning of April 2022; and that Treasury has also increased personal income tax brackets by more than inflation, effectively making close to R2.2-billion in relief available to households.
He also acclaims the R800-billion infrastructure investment drive.
“Overall then, while the February Budget demonstrates a number of improvements over the gloomy tone of the October MTBPS, a number of challenges remain, pointing to a tricky road ahead. All eyes will remain on government to rise to its goals, and if the necessary reforms are implemented with urgency, we may yet see the country finally change direction in terms of poverty, unemployment and inequality,” Ackerman posits.
RMB chief economist Ettienne Le Roux, meanwhile, commended Mboweni for remaining steadfast in pursuit of fiscal discipline.
“Spending restraint remains a more effective tool than tax hikes to help achieve debt stabilisation. In this respect, withdrawing last year’s proposal to raise an additional R40-billion over the medium term through tax measures is welcome news.
“Staying the course with regard to wage bill restraint is commendable. Growing the bill at 2% to 3% below projected inflation will take some doing, but it’s a crucial part of what’s necessary to turn the country’s debt trajectory around,” he says.
Le Roux notes that, in the longer term, a blended approach of spending restraint, coupled with growth-boosting reforms remains South Africa’s best shot out of its fiscal quandary. However, he cautions that there is no room for error either way, as a breach in compensation ceilings or GDP growth undershooting ambitious targets would quickly reverse matters.
“Notwithstanding a slightly improved debt trajectory, debt service costs will still absorb around 21c of every R1 of revenue collected. This highlights the need for a long-term approach to sustainably lift revenue through growing the tax base which, in turn, won’t be possible without the successful implementation of growth-boosting reforms involving the government, business and labour, all pulling in the same direction,” he says.
International banker Investec also noted positive news with regard to the Covid-19 vaccination rollout, with government to roll out out a free mass Covid-19 vaccination campaign for which R10-billion has been allocated in the medium term.
The bank also notes that credit rating downgrades may have been avoided in the near term; however ratings agencies will still watch for evidence of implementation of key reforms, reiterated by government in the 2021 State of the Nation Address, which are necessary to boost investor confidence and accordingly drive growth.
However, nonprofit Trade & Industrial Policy Strategies (TIPS) says the budget falls back on business as usual.
“It does far too little to mobilise the resources on the scale required to accelerate the recovery, and even less to promote reconstruction toward a more dynamic, equitable and inclusive economy. The only radical new measure is the welcome funding for vaccines on a large scale. Beyond that, the budget falls back on austerity, paid for mostly by the poorest citizens,” it says.
In real terms, it notes budget cuts to programmes that are critical for the poor, notably social grants and education across the spheres.
“The problems emerge in the treatment of industrial-policy financing. The Department of Trade, Industry and Competition's (DTIC's) funding remains 10% below 2018 levels in real terms, although it recovers a bit from the even harsher cuts imposed in the 2019/20 adjustment Budget.
"Incentives are reduced by almost 20% after inflation, with the sharpest cuts going to the allocation to the IDC and some enterprises. The DTIC has reallocated funds within the smaller envelop to promote innovation and diversification which is a positive development, but the cuts will make progress far more difficult,” it says.
Also expressing concern is business group Sakeliga, with CEO Piet le Roux saying that the “alarming” bottom-line is the Budget’s projected deficits range between 2 and 3.5 times compared to those of the final days of the Jacob Zuma era.
“From the point of fiscal and economic sustainability, Mboweni’s latest budget is therefore at least twice as concerning as those of former Finance Minister Malusi Gigaba.
"The increase in expenditure and debt must, however, not be laid at the feet of Mboweni, but at those of government for its failure to implement the required structural and policy reform,” he states.
Meanwhile, research house Intellidex labelled the budget “positive but risky”, with some surprises.
“While we expected the -9.3% GDP budget deficit next year and the gross financing requirement was only marginally lower – there was more consolidation baked in from underlying expenditure cuts in future years, better National Treasury revenue forecasts than expected and only a more gradual rise in debt service costs over time,” it says.
Intellidex notes that there were no firm additional details on the Loan Guarantee Scheme, and, while this was expected, it leaves a gap.
Integrated partnership Mazars tax partner Bernard Sacks says the Budget may have contained a little good news for middle-class income taxpayers, but arguably, not much has changed.
He notes that the most prominent announcement seems to be the above-inflation increases in personal tax brackets and rebates (providing some relief for struggling taxpayers), and an 8% increase in excise duties on tobacco and alcohol products.
“To some degree, I am a bit more worried about the points that the Minister did not include,” he says.
Sacks says there should be some concern that Treasury still has not presented an answer regarding the Public Sector Wage Bill.
Moreover, he suggests that there should have been more clarity on the issue of South Africa’s rapidly increasing debt.
“The debt-to-GDP ratio is now expected to peak at 88.9% in 2025/26. To place this into perspective, South Africa’s debt-service costs now exceed the amount spent on health in this country,” he said.
Mazars in South Africa tax consulting director David French says that while changing the corporate tax rate to 27% from next year looks like a decrease on the surface, the effective tax rate for corporations has in fact not decreased.
He says Treasury will also be limiting interest deductions and the use of assessed losses. “As the Minister explained, the tax decrease will be done in a revenue neutral manner, which, in effect, tells us that the tax decrease does not really mean anything.”
Industry organisation Minerals Council South Africa comments that, in presenting a plan for stabilising government debt at 88.9% of GDP in four years’ time, and stressing the importance of fiscal discipline, Mboweni has offered a glimmer of hope that South Africa can avert falling off the threatening fiscal cliff.
It also welcomes his sentiments on the need for structural economic reform, but says more detail is required, in particular in relation to unlocking private sector investment in energy, rail and ports.
“The commitment of R791-billion expenditure on infrastructure is welcomed, but collaborative partnership between the government and private sector is key to unlocking these investments,” the council emphasises.
It also welcomes Mboweni’s pro-growth signals, stating that this is in line with what the council had been advocating for some time.
The reduction of the corporate tax rate to 27% was one step towards bringing South Africa’s company tax regime closer to international norms. Raising the personal tax threshold by somewhat more than the inflation rate is also a positive step, in keeping the cost of human capital competitive, the council states.
“There are simultaneously strong signals that policing of corporate and public tax compliance will be strengthened. The recommitment to zero-based budgeting, too, is welcomed.
"Further, the Minerals Council welcomes the commitment that the South African Revenue Service is to take steps to restore the institution’s specialised audit and investigative skills. . .”
The council also supports government's focus on eradicating the abuse of transfer pricing, tax base erosion and tax crime; and government’s commitment to address the ambiguity around issues related to carbon capture and budgeting in respect of the carbon tax.
Law firm Webber Wentzel indicates that Mboweni aligned to widespread calls to avoid raising taxes, and to allocate more funds to rolling out vaccines. It notes that it was an optimistic Budget, but with some stings in the tail.
The firm says that the Budget delivered good news for taxpayers on a number of fronts, including households, particularly lower-income groups, to benefit from the above-inflation 5% increase in personal income taxes and rebates.
However, it notes that some of the other proposals necessary to raise tax revenue or increase the tax base will be less welcome by taxpayers, such as the above inflation 8% increase in excise duties on alcohol and tobacco products.
Industry organisation Agri SA says that, with the gross loan debt amounting to R5.2-trillion in 2023/24, and an estimated tax deficit of R213-billion, the country is on its way to a “fiscal abyss”.
North West University Professor Raymond Parsons notes that the slightly better economic and fiscal news, together with the vaccine rollout is welcome; as is the positive news of Treasury’s short-term funding arrangement.
However, he says the improved immediate economic outlook is what the country must now urgently build on to move its economic and public finances into more sustainable territory in the period ahead.
The Banking Association of South Africa says Mboweni has allocated scare resources to the best of his ability. It posits that this is not an austerity budget, but one that seeks to do its best for all with limited resources, as seen by the allocation to social security and development.
However, it emphasises that government can do much more, by removing red tape and inefficient regulation to boost business confidence and accelerate inclusive economic growth and job creation.
Business chamber Agbiz notes that stabilising government debt at 88.9% of GDP by 2025/26 and achieving a budget surplus at the same time is ambitious, but must be achieved to ensure a sustainable fiscal framework for the country.
The Steel and Engineering Industries Federation of Southern Africa said that government is trying to prioritise support for a rapid return to economic growth amid the Covid-19 pandemic and the associated national lockdown.
It welcomes government’s plans to boost local manufacturing production through various incentives to be provided by the DTIC.
However, it notes disappointment that there are still no concrete details around addressing logistical costs and rising energy costs, which it says are impacting on the competitiveness of local producers in the metals and engineering sector.