Treasury commits to hold the line on wage freeze
• Despite extremely tight fiscal position, proposed R40bn tax increase over the next four years will not be imposed
The Treasury has committed itself to hold the line on its fiscal consolidation plans without imposing proposed tax increases of R40bn over the next four years despite an extremely tight fiscal situation worsened by Covid-19.
Also, the corporate tax rate will be reduced from 28% to 27%, finance minister Tito Mboweni announced in his speech in parliament on Wednesday. This will be for the years of assessment commencing on or after 1 April 2022 and will take place alongside a broadening of the corporate income tax base by limiting interest deductions and assessed losses.
Deficit and debt to GDP forecasts fall sharply over the next three years relative to previous forecasts. The projected outcome will be welcomed by credit ratings agencies which have indicated that they will be watching the government’s adherence to its fiscal consolidation plans, but they will probably question government’s ability to achieve its ambitious targets.
Achieving its lower debt and deficit targets outlined in the budget will depend on higher rates of economic growth in 2022 than previously forecast to boost tax revenue as well as government succeeding in its bid to freeze public sector wages, which poses a significant risk to the fiscal outlook.
The Treasury admits that the economic growth outlook “remains highly uncertain” with possible new waves of Covid-19 infections. A revenue overrun of R99,6bn in the current year reduced the shortfall of R312,8bn projected in the medium-term budget policy statement (MTBPS) in October and helped ease fiscal pressure on state spending, providing it with the space to support the economy and the health sector while narrowing the budget deficit more rapidly than projected.
The extra revenue will be used to reduce the borrowing requirement and debt issuance.
Treasury chief director of macroeconomic policy Ian Stuart said in an interview the Treasury had stuck to the spending plans in the MTBPS except for short-term spending on fighting the Covid-19 pandemic and job creation.
This included a “tough ceiling” on wage growth. Public sector wages are to be cut by R303bn over the four years including 2020/2021.
Consolidated noninterest government spending will fall an average of 5,2% in the medium term, giving a total of R265bn, of which wage reduction will constitute R144bn in addition to the R160bn provided in the 2020 budget. Excluding compensation of employees, expenditure grows by an annual average of 0,4%.
The Treasury said in the Budget Review that the budget was aimed at “promoting economic recovery and returning the public finances to a sustainable position ... government’s balanced and prudent fiscal strategy is designed to stabilise public finances”.
But it warns that “the outlook remains highly uncertain and the economic effects of the pandemic are far reaching”. The MTBPS Treasury forecasts growth of 3,3% in 2021 — the same as in the MTBPS — 2,2%
(1,7%) in 2022 and 1,6% (1,5%) in 2023/2024. The main budget deficit is forecast to be 12,3% (14,6%) in 2020/2021, 9% (10,1%) in 2021/2022, 7,4% (8.6%) in 2022/2023 and 6,5% (7,3%) in 2023/2024.
Strong improvement relative to October forecasts are also projected for gross debt as a percentage of GDP which is projected to stabilise at 88,9% in 2025/2026 compared with the 95,3% forecast for the same year made in October. Forecasts have been cut to 80,3% (81,8%) for 2020/2021, 81,9% (85,6%) for 2021/22, 85,1% (90,1%) for 2022/2023 and 87,3% (92,9%) for 2023/2024.
The government aims for a primary surplus (when total revenue exceeds noninterest expenditure) in 2024/2025 instead of the 2025/2026 forecast in the MTBPS.
The budget allocates R9bn for a free vaccine rollout — R6bn for 2021/2022 and R3bn for 2022/2023 — in addition to the R1,3bn allocated in 2020/2021 for vaccine purchases. Also, R11bn has been assigned in 2021/2022 for the public employment programme.
The Land Bank will be recapitalised with R5bn in 2021/22 and R2bn in both 2022/23 and 2023/24 and
Eskom will get R31,7bn in 2021/22. In terms of prior budgetary commitments SAA was supposed to get R4,3bn in 2021/22 and R1,8bn in 2022/23 but no allocation was made in the 2021 budget. In its bid to underpin the economic recovery, government plans to inject R18bn over the next three years into the Infrastructure Fund.
Social grants go up by less than the inflation rate with the social grants budget being cut 2,2% over the next three years. In 2021/2022, R2,1bn is allocated for the special Covid19 social relief of distress grant which will continue to end
April. Personal income tax brackets get an above-inflation increase of 5% at a cost to the fiscus of R2,2bn benefiting mainly the middle to lower income brackets. This cost to the fiscus is fully offset by the export tax on scrap metal (R400m) and increases in excise duties on alcohol and tobacco (R1,8bn).
Excise duties on alcohol and tobacco products will increase 8% in 2021/2022 taking the excise duty on a packet of 20 cigarettes from R17,40 to R18,79.
The fuel levy increases by 15c/litre for petrol and 11c/litre for the Road Accident Fund.