“The decision to refrain from raising taxes can be ascribed to the weak economy, which would render more tax increases ineffective,” says Tertia Jacobs, Treasury Economist at Investec Bank.

Other relief came in the form of a higher tax threshold for small businesses and the decision to leave the VAT rate unchanged. Jacobs notes that government has acknowledged that new tax increases could harm the economy’s ability to recover.

Jacobs points out that the slower growth rate in private sector wages and a stagnation in consumption and business profitability have resulted in significant downward revisions in personal income tax, corporate income tax and VAT receipts over the past five years.

The relief provided in the Budget will hopefully provide some stimulus to the economy and the consumer in particular. This could give a boost to JSE-listed companies that are focused on the domestic economy.

Jacobs says that the impact on inflation through sin taxes will be muted, with the fuel levy increased by 16c/l and the RAF levy by 9c/l. Excise duties have been raised by 4.4%, sparkling wine by 6% and tobacco by 7.5%.

The corporate income tax (CIT) system will be restructured over the medium term, says Jacobs, to widen the tax base and reduce the rate. This will be implemented in a revenue neutral manner. It’s important to note that South Africa’s main trading partners have reduced CIT rates to an average of below 28%, says Jacobs. 

While this acknowledgement by government that there is little to no more room to fund its needs through higher taxes, it does leave a great deal of heavy lifting to be done through spending cuts, notably a reduction in the public sector wage bill of R160.2bn over the Medium Term Expenditure Framework (MTEF) period (three years).

“This will be negotiated in the Public Service Coordinated Bargaining Council in terms of pay progression, cost of living and other benefits. The assumption is an increase of 1.5% in F20/21, compared to the MTBPS forecast increase of 6.9%,” says Jacobs. “This implies that the final year of the three-year wage settlement needs to be renegotiated by 1 April.”

Jacobs adds that this would not reduce the primary balance, excluding financial assistance to Eskom, on account of lower nominal GDP growth and lower revenue receipts.

She notes that spending continues to be redirected to Eskom and other state-owned enterprises (SOEs), which means that lowering the debt trajectory remains a challenge over the medium term.

“Spending cuts are not enough to reduce the primary balance deficit and the debt trajectory is therefore unlikely to stabilise over the next three years,” says Jacobs. Debt-to-GDP is now forecast to hit 71.6% by 2022/2023.

Similarly, debt servicing costs continue to accelerate and are taking up an increased share of revenue, rising from R298.9bn to R385.9bn.

Meanwhile other threats remain to the outlook, says Jacobs, including the deteriorating financial performance of state-owned enterprises and the ongoing support that government has had to provide for them.

In short, much depends on how successful government is in implementing reforms and sealing a “social compact” with unions in order to bring down the public sector wage bill. If government can “crowd in” the private sector, it stands a better chance of getting South Africa out of the low growth trap, which is really the only way the debt trajectory can be meaningfully lowered.

Jacobs believes a ratings downgrade by Moody’s next month can be avoided.