This is what you need to know
Tax relief for individuals has come in the form of an increase in the tax brackets: you have to earn more to go into a higher tax bracket, which means you pay less tax. By and
The build-up to this year’s Budget speech has been sombre. Traditionally, this is the time of year when pundits speculate about what needs to be done to drive economic growth in South Africa.
This year the sentiment has been more centred on damage control than on growth.
As at the time of the Medium-Term Budget Policy Statement (MTBPS), South Africa was borrowing approximately R2.1-billion a day.
Granting above-inflation personal income tax relief of R2.2-billion by adjusting tax brackets and rebates.
Unemployment Insurance Fund contribution ceiling will be increased to R17,711.58 per month from 1 March 2021.
At the same time, the country’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 – 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 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-19 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?
Finance Minister Tito Mboweni delivered a speech 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 because 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 MTBPS was given, the government has decided not to impose the R40-billion of potential taxes that were considered in the MTBPS. Tax collection in 2021/22 is expected to be R1.37-trillion, up from R1.21-trillion in 2020/21.
Mboweni said tax increases must be kept to a minimum – therefore there is no need for a “tax revolt’”. The 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 rollout of the Covid-19 vaccine, for which the government has budgeted R10-billion (with an additional R12-billion held in a contingency fund).
The Finance Minister said that to achieve growth into the future South Africa needed 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.
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 said South Africans needed 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, 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. Although the minister acknowledged that public sector wage negotiations were ongoing, he mentioned the creation of two initiatives that would spend almost R100-billion on creating jobs, namely, the Public Employment Programme (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 MTBPS 2020 was delivered. The 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 South Africa’s attractiveness as a country to invest in directly (eg: build an operations plant).
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.
Old age pension R1,890
War veterans pension R1,910 Childcare R460
Foster care R1,050
The 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 usual “sin taxes” apply (8%). Personal income tax brackets are increasing by more than inflation (5% across the board). This is more than inflation, so in real terms employees will pay less tax.
The corporate income tax is to be reduced to 27% from 1 April 2022 to promote direct investment in South Africa. Borrowing of about R500-billion per year is envisaged for the next three years before debt levels begin to stabilise in 2024/25.
The government has set up two funds that are collectively worth just less than R100-billion to promote employment. 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 formally employed individuals (with 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 it’s too late.