2020/2021 Budget review: Pleasant surprises and lingering questions
27 Feb 2020
The Budget delivered a pleasant surprise for taxpayers in the form of no new tax proposals (apart from R2bn in the form of a carbon tax) and there was even some relief in the form of an above-inflation allowance for bracket creep.
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Consideration has been given to the fact that the shortfall in revenues has exceeded the amount by which taxes have increased.
Tertia Jacobs, Investec Treasury Economist
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.
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.
Question marks about the debt-to-GDP trajectory
“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.
“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.
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.
About the author
Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.