Budget 2021: moving to the left or the right?
Government playing larger role in economy vs creating conditions for effective service delivery
THE Budget speech came at a time of great uncertainty as to whether there might be a third wave of Covid-19 infections, delays in vaccinations, and further restrictions on the economy.
The Covid-19 pandemic caused tremendous social and economic disruptions during 2020, and the question is whether 2021 will be the start of a restoration period of renewed economic growth and confidence.
The International Monetary Fund and the World Bank predict a global economic growth rate of between 4% and 5.5%.
This bodes well for commodity prices, South African exports, the balance of payments, job-creation, and the value of the rand.
Despite predictions of higher global growth rates and an estimated South African gross domestic product (GDP) rate of 3.3% this year, the minister of Finance, Mr Tito Mboweni, did not have much room to move within his Budget.
The Budget balance for 2020 is headed for a shortfall of approximately R700 billion. The Budget deficit for 2021 is estimated at R370bn or 6.8% of GDP, and national debt at about R3.56 trillion or 65.6% of GDP. South Africa’s high fiscal debt levels restrict expenditure options and the future fiscal sustainability of uncontrolled spending.
Although it is estimated that tax revenue collection will be R100bn higher than expected and that a higher economic growth rate will boost the revenue side, the options for increasing taxes were very limited. The lockdown restrictions have had a severe impact on the finances of households and businesses in South Africa.
The country’s current marginal personal income tax rate of 45% and a company tax rate of 28%, which is high compared with international standards, only provided the possibility to hike the 15% VAT rate.
It was expected that sin taxes on the consumption of cigarettes and alcohol would increase despite the negative effect that the lockdown restrictions had on these industries, causing retailers to close down as well as 165 000 job losses.
The introduction of a wealth tax had been discussed, but the complexity thereof could deter the implementation of such a tax.
It is expected that expenditure on education, social development, health, debt-servicing cost, and economic development will constitute the major expenditures this year.
There are doubts as to whether the political will exists to reduce expenditure on SOEs and the government’s wage bill. Applying the principle of maximum social gain in these spending decisions has been questionable in the past. Provisions to finance the cost of the vaccination programme and the continuation of Covid-19 support programmes will cause additional Budget constraints.
The 2021 Budget will once again provide evidence of the government’s ability and willingness to move to the left by playing a larger role in the economy, or its ability and willingness to move to the right by creating a conducive environment to ensure effective service delivery and infrastructure development, and implementing the required structural reforms to allow the private sector to grow the economy and provide sustainable job opportunities.