The Budget Speech 2020 Good or Bad for the Individual?

Bryden Morton, Executive Director, 21st Century
Bryden Morton, Executive Director, 21st Century

The lead up to the 2020 South African Budget Speech has been dominated by a number of differing views regarding which taxes will be increased. The common thread amongst these differing views was that taxes will increase to support a growing deficit. Treasury estimated that SA’s debt to gross domestic product (GDP) ratio would be 59.7% (2019/2020) at the same time of last year’s budget speech. Following the current trajectory of the economy this ratio is forecast to rise to 71.3% by 2023 due to the ever-widening fiscal gap. There are two main mechanisms available to Treasury if it is to reduce the debt to GDP ratio:

  1. Raise Revenue – This is done almost exclusively through tax collection such as corporate tax, personal income tax, value added tax (VAT) and sin taxes (tobacco products and alcohol). Revenue collection has come in below the budget estimate in each of the last six years which creates further need to raise revenue.

 

  1. Reduce Expenditure – This will be the more difficult of the two to achieve. South Africa has a large social security burden, paying in excess of 18 million social grants per year. There are also other areas of the economy which have an ever-increasing requirement for more funding if they are to keep up with demand and improve, such as health care, schooling and crime reduction. A number of state owned entities (SOEs) have put additional pressure on the fiscus as Treasury seeks to keep them afloat. Reducing the funding available to any project, department or organisation will reduce its ability to perform at the required level and affect service delivery.

 

The debate surrounding which taxes will be altered have been dominated by suggestions such as increasing VAT, sin taxes, fuel levies, personal income tax and capital gains tax. One of the few taxes which has almost unanimously been ruled out is increasing corporate/companies’ tax. The chief driver of this consensus is South Africa’s desire to attract foreign direct investment to increase economic activity and stimulate employment. An increase to corporate taxes would prove as a deterrent to foreign direct investment and will not be considered for an increase. The unemployment rate is currently 29.1% (Q4 2019) which makes saving on the public sector wage bill a difficult task. Currently the government wage bill is 35% of its total expenditure. These two facts are on opposite ends of the scale when looking at the options that are available to government (reduce the employee head count or maintain the status quo). These discussions were all matters of opinion in the lead up to the budget speech.

In the build up to the budget speech, Daniel Silke speaking on eNCA spoke of the Laffer Curve and whether or not the South African public were taxed to the extent that it promotes non-compliance.

The Laffer Curve is an economic construct which illustrates that there is a tax ‘sweet spot’ that a country must strive towards. A country to the left of apex of the curve will collect more tax revenue by raising taxes. Conversely, a country to the right will collect less tax revenue as taxes increase (mostly through avoidance and non-compliance). Revenue collection has fallen short of the budgeted revenue collected for the sixth consecutive year which suggests that Silke’s comments may be correct. Minister of Finance, Tito Mboweni appears to agree with this sentiment because  he resisted the temptation to raise taxes significantly. This is in stark contrast to the expectation before the budget speech. Personal income tax has been left relatively unchanged. In the spirit of the progressive tax system South Africa, more relief has been given in the lower tax brackets compared to the higher tax brackets. The cost of this is a projected fiscal deficit of 6.8% for 2020/21 – taking SA’s overall debt to GDP ratio to 65.6% at the end of that period. The good news is that those purchasing properties to the value of R1 million or less will not pay transfer duties  – an attempt to encourage stimulation in the property market.

The bad news for individuals is that they will be met with the following increases in taxed on expenditure:

  • 340ml beer or cider – Increased by 8c
  • 750ml wine – Increased by 14c
  • 750ml sparkling wine – Increased by 61c
  • 750ml spirits – Increased by R2.89
  • Pack of 20 cigarettes – Increased by 74c
  • 25 gram pipe tobacco – Increased by 40c
  • 23g cigar – Increased by R6.73
  • Fuel levy – Increased by 25c per litre
    • General Fuel levy – Increased by 16c
    • Road Accident Fund levy – Increased by 9c

The state continues to support the needy through increases in social grants over 18 million social grant beneficiaries in South Africa as follows:

  • Old age and disability pension – Increased by R80 to R1860 p/m
  • Foster care grant – Increased by R40 to R1040 p/m
  • Child grant – Increased by R20 to R445 p/m

Two significant announcements that are worth mentioning are the formation of a State Bank and the formation of a Sovereign Wealth Fund. The State Bank is intended to operate using the same model as a regular retail bank operating on commercial principles. The purpose of the Sovereign Wealth Fund is to invest in South Africa’s future. Building a fund of this nature can serve to assist South Africa as a counter cyclical hedge fund during difficult economic times and act as a financial safety net in these times. Both announcements will undoubtedly be met with mixed views as there will be those that welcome the forward-looking approach and those that believe that we can’t service our current debt and this investment will only add to this. Over the next three years, government plans to cut its expenditure by R156 billion. If implemented correctly this would go a long way towards balancing the fiscus.

For individuals, this was a promising budget speech as the effective income tax burden we face will reduce marginally. Sin taxes and fuel levies did not increase by large amounts and social grants increased in a similar fashion to previous years. Looking at the budget from the country’s point of view of arresting the growing debt to GDP ratio, this budget does not address this issue. This budget would have been keenly watched by Moody’s, the last ratings agency that have South Africa at investment grade. This budget would have done little to satisfy their negative outlook given that a large fiscal deficit is expected for 2020/21. All eyes will be on Moody’s review of SA’s credit rating on 27 March 2020. The consensus among many individuals in the public is that the Moody’s downgrade is inevitable but if this budget speech is anything to go by, we may just be in for a surprise.

Written by:

Bryden Morton, B.Com (Hons) Economics, Executive Director – [email protected]

Chris Blair, B.Sc Chem. Eng., MBA – Leadership & Sustainability,  CEO – [email protected]

 

About 21st Century

21st Century is a specialist Remuneration, Organisation Development and Change Management consultancy, with over 1700 clients nationally and internationally. Our 60 in-house specialists are committed to staying future-focused and in the know about industry trends.

21st Century has proudly maintained a B-BBEE level 2 rating since 2015. Our sustainable Remuneration solutions are based on an audited salary survey database and established web-based Remuneration Systems and Remuneration training courses.


Issued By: The Lime Envelope
On Behalf Of: 21st Century
For Media Information: Bronwyn Levy
Telephone: 011 467 9233
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