A combination of tax relief and improving revenue collections should contribute to the twin goals of fiscal consolidation and support for the economy, which in turn should be positive for markets.

That’s the message from Investec Treasury Economist Tertia Jacobs, assessing Wednesday’s Budget speech and Review. While the projected trajectory of debt-to-GDP is worse than it was a year ago, ahead of the lockdowns, it has improved significantly since the October Medium Term Budget Policy Statement (MTBPS), thanks to better-than-expected tax revenues, which, should they continue, support the process of fiscal consolidation and debt stabilisation.

“In the October 2020 MTBPS, fiscal consolidation was stretched out over five years with a strong reliance on spending cuts (mainly a freeze in the public sector wage bill), which curtailed the increase in non-interest spending,” Jacobs explains.

“Fiscal consolidation is now expected to materialise at a faster pace, thanks to an overrun in revenue receipts of R99.6bn, which can now be directed to lowering bond supply (by running down cash balances), and to finance additional spending in the upcoming fiscal year.”

Jacobs explains that this means that the main Budget deficit has now been reduced by R278bn over the Medium Term Expenditure Framework (MTEF) period, compared to the October 2020 MTBPS forecast: F20/21 at 12.3% of GDP vs MTBPS at 14.6%; F21/22 at 9.0% vs 10.1% and F23/24 at 6.5% vs 7.3).

The good news on the revenue front has also allowed for some tax relief for businesses and households.

The corporate income tax rate is to be reduced, from 28% to 27%, in 2022, although the number of tax incentives, expenditure deductions and assessed loss offsets, will also be reduced. South Africa’s corporate tax rates are high by global standards and this move signals an intent to bring them in line with global norms.

Importantly, there have been no hikes to direct taxes on individuals. Tax brackets have also been adjusted at above-inflation rates, providing further welcome relief.

Alcoholic and cigarette duties are increased by 8% and the fuel levy by 26c/l.

Jacobs says there is an acknowledgement by National Treasury that tax increases over the past six years have had a negative effect on growth than spending reductions, as the spending multiplier has declined. The tax base has narrowed, she notes.

“Progress is being made in rebuilding SARS, with the re-establishment of the Large Business Centre, and units focusing on litigation, compliance and integrity,” she adds.

The above should all, on balance, be good for consumer and investor confidence, as households and businesses rebuild and the economy continues to open up with vaccine rollouts. This should help underpin revenues over the MTEF period.

However, the sustainability of the process of fiscal consolidation will hinge on a number of factors, namely:

The sensible and productive allocation of expenditure

Jacobs notes that a key concern continues to be the ability of the government to control wasteful spending. “In this regard government is reviewing spending across sectors to improve efficiency. There are opportunities for restructuring, including merging or closing entities to reduce duplication of functions,’” says Jacobs. “There are also massive inefficiencies in some infrastructure programmes.”

Jacobs adds that zero-based budgeting principles will be piloted by the Department of Public Enterprises and the National Treasury in the coming year.

Containing the risks around support of state-owned enterprises (SOEs)

The financial position of SOEs remains a major risk, although contingent liabilities have been contained, with exposure to Eskom down to R316.8bn from R326.9bn and SAA to R6.2bn from R17.9bn, Jacobs points out. “A detailed plan for dealing with SOEs is awaited,” she adds.

Implementation of structural reforms

The acceleration of structural reforms needs to prioritised, says Jacobs. To this end, Operation Vulindlela will hopefully see a faster rollout of structural reforms. “These include the objectives set out in the SONA, as well as the release of digital spectrum, the expansion of the electronic visa system, waivers to support tourism, improving the efficiency and competitiveness of South Africa’s ports, and strengthening the monitoring of water quality and energy,” she says.

One of the risks to the outlook include a slower economic recovery, such as setbacks as a result of a third wave of the coronavirus or delays in the rollout of vaccinations, or from weaker commodity prices – which in turn is linked to the global recovery.  These outcomes could translate into a lower revenue outlook and worsen the debt-to-GDP trajectory.

Further risks come in the form of higher SOE contingent liabilities and a worsening in the financial positions of municipalities that would require further financial support.

However overall, South Africa should avoid sovereign credit downgrades this year, Jacobs concludes.