Sunday Times

Godongwana chose South Africa over playing politics

- ZANDILE MAKHOBA ✼ Makhoba is an economist and the lead specialist of research and analytics at Liberty, the insurance and asset management arm of Standard Bank.

In an election year when appeasing the majority may have been the preferred course of action, finance minister Enoch Godongwana chose South Africa over politics. Nobody liked the outcome, but there is often a conflict between doing what is right and doing what is nice. The rand closed stronger on Wednesday evening, indicating that the fiscal plan was well received internatio­nally, validating some tough decisions. Yet there is scepticism among citizens.

Against a backdrop of global instabilit­y, we are at a critical juncture after the inefficien­cies of the economy have led to low profitabil­ity in the private sector, resulting in low corporate income tax revenues. So it may be more a forced hand than a noble deed that drove these fiscal plans. The situation has forced the Treasury to look elsewhere to keep the country afloat — people, not companies, will have to carry the burden.

Godongwana introduced increases in personal income tax after beginning his speech with concerns over significan­t debt servicing costs and an anticipate­d rise in the debt to GDP ratio in the 2024/25 fiscal year. This crystallis­es the difficulty in putting this budget together, with the country dipping into gold reserves to make ends meet. But to avoid this juncture in future — which could be described as filled with desperate measures — economic activity will need to be revived.

In the midst of a cost-of-living crisis, the effect of the minister’s announceme­nt is that individual­s are likely to pay more income tax in the coming year, or worse, experience bracket creep. This is largely a concern for the middle class, while the affluent breathe a sigh of relief over the death of rumours of a tax on the super-rich. The Treasury must be concerned about capital flight. With the top 20% of earners accounting for 80% of wealth, it is not what South Africa needs when currency weakness has contribute­d to the fiscal risks.

A short-term reprieve for the middle class may be found in the two-pot retirement saving system enabling consumers to withdraw cash from their protected retirement savings from September.

Nobody can be blamed for feeling a bit sceptical about a “silver lining” to this fiscal plan. For many, the sentiment is that we have heard it all before. However, and maybe as a result of the limited room for manoeuvre, we are starting to see better policy commitment from the government — directly addressing low growth, unemployme­nt and safety/security.

First, the budget provides evidence of efforts to create a more enabling environmen­t for the private sector, and opportunit­ies to get involved in tackling our economic challenges.

Business participat­ion in logistics and energy is already happening, and these joint efforts between corporate and public entities should soon introduce improved economic activity and job creation in the short term, and muchneeded economic efficiency in the long term.

Second, the Treasury has also tabled the public-private partnershi­p framework, which hopefully will guide the expenditur­e of the notable R946bn infrastruc­ture budget and reignite activity in the constructi­on sector, which remains one of our more labour-intensive industries. It is quite timely that this was put forward just before the delivery of the budget (considerin­g it is an election year), but hopefully this shows a sense of urgency from the Treasury.

Finally, plans to support and incentivis­e electric vehicle production will support the motor manufactur­ing sector — also more labour intensive than others — and secure vehicle export capacity, which is crucial for the trade balance and supporting the value of the rand.

All of these have the potential to fix some of the challenges faced by the country (energy, infrastruc­ture backlog and export competency). All in all, the budget is promising for business owners in multiple industries, which will foster a recovery in corporate income tax.

Still, the Treasury needs to be more deliberate than ever to regain the trust of business, which is the more sustainabl­e solution to the high unemployme­nt. The government’s commitment to these plans is crucial for reviving both business and investor confidence, or we may soon see the personal income tax base dwindling as well. The Treasury estimates GDP will expand a mere 1.3% this year. Given the current state of our economy, we don’t have great margins for failure, nor the luxury of much time.

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