Finance Minister, Enoch Godongwana’s first National Budget Speech offered no great surprises, either positive or negative. It was a well-considered, realistic budget, that met market expectations. The rand barely budged, showing that the markets were not stirred.
On the back of a solid fiscal year, Godongwana was able to present a responsible budget that balanced the country’s social concerns with the need for greater economic growth. However, if this budget wants to not be relegated to the dusty “all talk and no action” shelf, the government has to move quickly to implement the structural changes that have been promised in the past State of the Nation and National Budget speeches.
STABILISING NATIONAL DEBT
The Minister started off his address by stressing the need to stabilise government debt. He noted that the country’s debt burden is a matter of serious concern. This financial year has seen debt reach R4.3 trillion rand, and this is expected to rise to R5.4 trillion rand in the medium term. The country’s debt-servicing costs will average around R330 billion over the medium term. This, as the Minister stated, is more than the allocations to health, policing and basic education – three important portfolios.
Treasury is looking to narrow the country’s budget deficit from 5.7% of the size of the economy in 2021/22 to 4.2% in 2024/25 and stabilise debt at 75.1% by 2024/25. In addition, the country is reducing its borrowing requirement by using some of the revenue collected from a bumper year in the fiscus. The country’s borrowing requirement is budgeted to decrease from R135.8 billion to R131.5 billion over the next two years.
Despite this positive outcome, South Africa’s fiscal framework is exposed to a number of risks which include:
- Slowing global and local economic growth – with high inflation and geopolitical risks.
- Pressure from the public service wage bill – with no clear contingencies in place.
- Continued bailouts of state-owned enterprises (SOEs).
TOUGH LOVE FOR SOEs
Godongwana did surprise when he took a tough stance on the country’s SOEs. In his speech he said, “Their future will be informed by the value they create and whether they can be run as sustainable entities without bailouts from the fiscus.” He then explained that in order to reduce continuing demands on South Africa’s public resources, the National Treasury will outline criteria that will be needed to be met, should these organisations wish to get government funding in the upcoming financial year.
Godongwana made the point that if SOEs cannot implement sustainable bailout plans, they face being rationalised or consolidated. Eskom was the only SOE that was given some leeway. The power producer will be given a further R136 billion until 2025/26 to help fund its current debt burden. He noted, however, that National Treasury is working on a sustainable solution to deal with Eskom’s debt in a manner that is equitable to all parties.
NATIONAL GROWTH – 2% IS NOT ENOUGH
While the Minister spoke about the need to boost infrastructure investment and reduce crippling unemployment – youth unemployment stands at around 64% – he had to concede that South Africa’s growth trajectory in the near future is looking rather bleak. He made a point of saying the country needs a growth rate of well over 2% to meet its current social and development goals.
National Treasury has predicted real Gross Domestic Product (GDP) to hover around 1.8% per annum over the next three years. Given the country’s population growth of around 1.5% per annum, this is a neutral growth number and will have little positive impact on record-high unemployment. In fact, the International Monetary Fund pegged South Africa’s growth prospects at 1.4%, in January, and stated that this was the lowest growth figure of any country in the world.
Unless South Africa can implement structural changes, which include shaking up the ports authority, fixing road and rail infrastructure, upgrading national border posts like Beitbridge, and boosting private investment, this growth trajectory is unlikely to improve. This does not bode well for the country’s ability to meet debt costs, reduce unemployment and continue subsidising its social initiatives including the extended COVID-19 relief grant of R350 per month. The Minister noted that currently 46% of South Africans are receiving social grants.
A big positive for our clients in the budget is that Treasury has not increased taxes but has, in fact, looked at ensuring that taxes are either maintained at their current levels or lowered. The corporate tax rate was reduced from 28% to 27% as of the new financial year. This brings it closer to the Organisation for Economic Cooperation and Development (OECD) global average of 23%, while personal tax thresholds were raised in line with inflation.
Even though the corporate tax rate has been reduced, revenue collection will not suffer as the plan is to broaden the tax base. In line with what was reported previously, companies may now only employ 80% of losses brought forward, meaning, in future, they will be required to pay tax on the remaining 20%, which they would not have previously had to do. We would advise businesses to talk to their accountants to get a clearer indication of how the new tax provisions will impact business tax.
Wealth tax was not mentioned, but we do believe that the South African Revenue Service (SARS) is still looking at it as an option in the future. The institution is ordering people with an excess of R50 million in assets to declare the market value of specified assets in their tax returns. This is in line with SARS’ efforts to obtain more data on the true wealth of taxpayers, for the purpose of a possible wealth tax. We will continue to keep an eye on developments and update clients when greater clarity is received.
Luxury goods, however, did not escape Treasury’s notice and alcohol and tobacco products will see increases of between 4.5% and 6.5%, while sugar and carbon will both be more heavily taxed in the upcoming financial year.
The fuel price structure will be reviewed to ensure fuel prices remain within the means of the economy.
CHANGES TO RETIREMENT FUNDS
Although very vague, changes are afoot with regard to Regulation 28 and retirement funds. There are three changes that were tabled. The first was the mention of a new law regarding withdrawals from retirement products. The Minister referred to a ‘two-pot’ system, which will allow fund holders to withdraw a lumpsum before retirement age.
The second development addresses changes to enable greater infrastructure investments by retirement funds into the country’s infrastructure programmes.
We will update you on these two points, as soon as more information becomes available.
Lastly, the offshore limit for all insurance, retirement and savings funds were harmonised at 45%, inclusive of the 10% into Africa. The previous maximum level was set at 30%. This increase and additional flexibility to tap into global markets is a welcome change.
This budget was realistic and expected. There was nothing that surprised. Many may argue it was disappointing in its lack of offering any definitive action. We do, however, feel the budget was indicative of relative stability in the country’s fiscal situation for the next financial year.
At Citadel, we are prepared for unexpected surprises. That is why we always work to a long-term investment strategy. We ensure your portfolio is well diversified and able to weather the storm in times of economic and financial market uncertainty.
We would like to remind you of our webinar in partnership with the Paternoster Group and the Financial Mail at 09:00 tomorrow. The panel will comprise Minister Godongwana, Citadel Chief Investment Officer, George Herman, Founding Partner of the Paternoster Group, Professor Richard Calland, and Financial Mail Economics Editor, Claire Bisseker. Click here to register.