Tito shows love during Budget crunch

With all eyes on him yesterday, Finance Minister, Tito Mboweni tabled the 2020/21 Budget speech in parliament with the consideration that fiscal spread should appease ratings agency, Moody’s and preserve the last remaining investment grade status.

The general ambition by South Africans coming into this year’s Budget Speech was that it needed to be substantial in how it’s going to grow the economy, while also addressing the growing fiscal deficit and lowering the debt trajectory.

There were chilling expectations from the Budget perpetuated by observers, including increases in Value Added Tax (VAT), personal and corporate tax. Much rode on the topical issues of cost reductions, energy security and reforms to stimulate the economy.

Consumers were warned they would feel the pinch of the rumoured tax reforms, however, the Budget panned out to be lenient on the consumer, in general.

Energy security

Energy security is key to economic growth, and parastatal power utility Eskom’s afflictions and vices have done strides to grow the economy no favours.

Mboweni has reportedly mentioned in the past that government needed to “honestly think” about nuclear power as an option, in order to assist Eskom in dealing with the huge demand.

Yesterday, the nation was told that it will shortly be possible for municipalities in good financial standing to purchase electricity from independent power producers.

Mboweni said, “government will do whatever it takes to ensure a stable energy supply. As I said, it’s our number one task. We have allocated R230 billion over the next ten years to achieve the restructuring of the electricity sector. The current electricity shortfall will ease once Eskom completes the critical maintenance work that they are doing.”

No major tax increases

One of the biggest shocks from the speech was that government did not raise VAT, or even income tax.

Mboweni boldly stated that the South African income tax system is progressive, and the adjustments reflect this.

“To support growth, we propose no major tax increases. I don’t know where people who talked about VAT increases got that from. Indeed, there is some real personal income relief,” he read.

The decision not to increase VAT isn’t just good news for households, but for business as well.

FNB Business Spokesperson, Kenneth Matlhole reacted, “the decision by finance minister not to increase VAT is positive for small businesses, as this would have significantly impacted on cash flow and input costs leaving businesses with no choice but to pass on the costs to consumers.  Furthermore, the tax review in the near future, for businesses will be a positive contribution in driving economic activity (sic).”

Tax increases

With no major tax increases announced, there is still a burden of injecting money into the fiscus. Considerable fuel levy and sin tax, as exercise duty on alcohol and tobacco is known as, increases were announced to serve this.

Motorists will see an increase of 25 cent on the fuel levy, of which 16 cents is for the general fuel levy, and nine cents is for the Road Accident Fund (RAF). The liabilities of the RAF are forecast to exceed R600 billion by 2022/23.

Mboweni argued, “we need to take urgent steps to reduce this risk to the fiscus and bring about a more equitable way of sharing this cost. One option is to introduce compulsory third-party insurance and we should debate this as quickly as possible.”

Those who consume products affected by sin tax have been hit on several fronts.

The sin tax amendment should secure considerable amounts of tax revenue for the state – considering that South Africa is recorded by the World Health Organisation as the sixth country that drinks the most in the world.

These increases are already in effect and are as follows:

• The price of a 340ml can of beer or cider rose by an extra eight cents.
• The price of a 750ml bottle of wine rose by an extra 14 cents.
• The price of a 750ml bottle of sparkling wine rose by an extra 61 cents.
• The price of a 750ml bottle of spirits, including vodka, whisky and gin, rose by an extra R2.89.
• The price of a packet of 20 cigarettes rose by an extra 74 cents.
• The price of 25g of pipe tobacco rose by an extra 40 cents.
• The price of a 23g cigar rose by R6.73.

New tax introductions

There had been informal suggestions that government should introduce a hefty tax on the legal cannabis industry, as it’s seen as a cash cow that’s worth billions. The minister did not include it in this Budget – however, in a move that showed a consolidation of government policy, he introduced new sin taxes.

“In line with the Department of Health policy, we will start taxing heated tobacco products, like hubbly bubbly for example. The rate will be set at 75 percent of the rate of cigarettes. Electronic cigarettes, or so called ‘vapes’, will be taxed from 2021” said Mboweni.

The market’s reaction

Portfolio Manager at PPS Investments, Reza Hendrickse said, “markets seemed to breathe an initial sigh of relief on the delivery of this year’s Budget Speech, with the Rand strengthening, and stocks and bonds climbing. Taking a step back however, while the policies aimed at supporting growth are vital to kickstart growth, and the R160 billion wage bill reduction is exactly what is needed, the fiscal deficit remains worrisome at 6.8%. In the short term, the deficit is slightly worse than what had previously predicted, but a slight improvement is predicted further out.”

Hendrickse did, however, concede that “it’s sobering that despite this years’ positive Budget interventions, the current 65% debt to GDP level is still projected to exceed 70% by 2023, which remains on the path towards unsustainable levels. Even with the positivity on the surface of this years’ Budget, the reality is that we may still only be tinkering at the margin if we consider the current debt trajectory. It is a close call as to whether Moody’s will once again give us the benefit of the doubt.”

Writer’s Thoughts:
This year’s Budget was essentially our last-ditch effort to keep our investment grade rating. The government seems to have played the balancing act fairly well. The decision not to increase VAT with the consideration of the current living standards of citizens, as the principal factor, shows that cool heads led the budgetary process. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts mashoto@fanews.co.za.

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