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A sigh of relief (for some)… following Budget Speech

25 February 2021 Myra Knoesen

In the wake of the Covid-19 pandemic, high unemployment rate and a weak economy, there is a sigh of relief (for some) as Finance Minister, Tito Mboweni, delivered his 2021 Budget Speech outlining the spending plans for the year ahead.

Amongst taxes, debt servicing and the funding of the Covid-19 vaccine roll-out, a panel of experts weighed in on the key takeaways from Mboweni’s Budget Speech.

What was acknowledged

“After a very difficult year, the National Treasury has produced an excellent budget. The Budget acknowledged the higher-than-expected revenue collections for the current fiscal year – likely to be about R103bn higher than forecast in the Medium-Term Budget Policy Statement (MTBPS). However, the Treasury are using the bulk of this windfall to consolidate South Africa’s immense debt burden,” said Nazmeera Moola, Head of SA Investments, and Peter Kent, Co-Head of Fixed Income at Ninety One. 

“Expenditure has been raised by R33bn in the coming year. Higher revenues and restrained expenditure left the Treasury room to cut local debt issuance by R92bn in the coming year. This reduction is key… read more. 

Some key takeaways

“The national treasury’s expected economic growth rate of 3.3% for 2021 is realistic and in accordance with our expectation of 3.2%. The consolidated budget revenue overrun of almost R100 billion compared to the MTBPS for 2020/21 assisted to reduce the budget deficit to 14% of Gross Domestic Product (GDP) compared to the estimate of the MTBPS of 15.7%. This had a knock-on effect, reducing the expected deficit over the forecast period up to 2023/24,” said Johann van Tonder, Economist at Momentum and Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments. 

“The MTBPS estimate was for gross debt to GDP to reach a peak at 95.3% in 2025/26. Enough money was set aside to vaccinate 67% of the population against Covid-19 in the next 12 months. Household consumption expenditure will gain from personal income tax bracket creep relief. However, personal savings could be affected negatively as the allowable annual deduction on contributions to retirement funds was reduced from R350 000 to R300 000. A one percentage point reduction in the corporate tax rate (to 27%) from 1 April 2022 should provide some reprieve to company profits. A contractionary budget amid fiscal consolidation favours fixed income assets over SA Inc equities. Another positive for the government debt market is the R128.6 billion reduction in the borrowing requirement and hence debt issuance in the medium term,” added van Tonder and van Papendorp. 

Tax treatment of retirement funds

“National Treasury will publish draft amendments to Regulation 28 for public comment. The proposed amendments seek to make it easier for retirement funds to increase investment in infrastructure,” said Chantal Marx, Investment Research Head at FNB Wealth and Investments. 

“Retirement fund members who become tax residents in another country which has a double tax agreement with South Africa will pay tax in that country. This means that South Africa forfeits its rights to tax the former South African resident. To overcome this, Treasury intends to tax a retirement fund member when they no longer qualify as a South African tax resident,” said Denver Keswell, Senior Legal Advisor for Nedgroup Investments.

“Also, South Africans with a Retirement Annuity value of less than R15 000 will be able to cash in the entire Retirement Annuity. This will be effective 1 March 2021. Transfers between retirement funds by members… read more.

Success of this Budget

“This Budget was most certainly taxpayer-friendly, with tax increases being kept to a minimum for both individuals and businesses,” said Carla Rossouw, Tax Lead at Allan Gray. 

“This is welcomed news and will go a long way to bolster the economy and South Africa’s competitiveness. An above-inflation increase in personal income tax brackets and rebates (effectively reducing personal tax in some instances) also provides real tax relief to individuals at a time when most are suffering immense hardship. The expected revenue loss will be offset by an increase in excise duties on tobacco and alcohol. The so-called ‘sin-taxes’ were increased by 8%. There was also no increase in capital gains tax and value-added tax (VAT) and dividend tax remain unchanged. Instead, we saw a continued focus on the tax collection improvements, enforcement and administration at the South African Revenue Service (SARS) with the latter being allocated an additional R3 billion… read more. 

“Adjusting for bracket creep will be consumer positive. But this will be partially offset by lower government wages, higher sin taxes, increased fuel levies, and below-inflation grant increases. The net effect is still expected to be positive for SA Inc. stocks, banks and retailers. The minister has perfected the art of striking a delicate balance of being both bond and equity friendly,” said Marx. 

Budget masks risks

On the downside, “The projected budget deficit figures have been reached by using highly optimistic assumptions regarding cutbacks and reprioritisations in government spending. As many of these cutbacks seem to rely on the ability to freeze government wages in order to reduce the pressure of the public sector wage bill, there is still a significant risk to achieving the projected figures, said Maarten Ackerman, Chief Economist and Advisory at Citadel. 

“Although Mboweni made the point that National Treasury will tap into its cash reserves to fund the budget shortfall, given that the economic recovery will be staged from a very low base, and that government has scrapped some of its taxes and offered some additional tax relief, this may prove difficult to achieve. South Africa is far from out of the woods in terms of risking a debt spiral, with one of the highest debt-service levels in the world. And these high debt levels and interest repayments leave only 80% of revenue for key and productive government spending. A number of challenges remain, pointing to… read more. 

“What the budget reveals is the extent to which the government is making South Africans pay. The tax-to-GDP ratio is now the highest in South Africa’s history and is causing considerable trauma across households struggling to afford goods and services. If it carries on like this, the government risks triggering a tax revolt,” said Dr Frans Cronje, CEO of the Institute of Race Relations (IRR).

Section 12J sunset clause

The Section 12J tax incentive will not be extended beyond its sunset date at end June. According to Jonty Sacks, Partner at Jaltech Fund Managers, “The Section 12J sunset clause has been a trending topic for Section 12J fund managers and taxpayers in the build-up to the Finance Minister's budget speech. The relevance is that when Section 12J was introduced, Treasury included a clause that would see to the incentive coming to an end at the end of June 2021. The sunset clause was inserted in the legislation in order to provide Treasury with an opportunity to assess the effectiveness of the incentive, and then to decide whether or not to extend the incentive. Treasury has determined that the incentive has not adequately achieved its objectives. The incentive has instead provided a generous tax deduction… read more. 

“Despite this being a market-friendly budget, implementation will be key – particularly on the reform and expenditure fronts,” concluded Marx.

Writer’s Thoughts:
There’s mixed feelings following Mboweni’s speech… mostly sighs of relief with tax increases being kept to a minimum. One question however, is, how long will it take (realistically) for the country to get back on track? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts.


Added by Paul Streng, 25 Feb 2021
Short answer: forever! Even Treasury is not optimistic. According to their own estimates, GDP growth in year 3 is estimated to be 1,6% which means over the next 3 years we would not have caught up with the loss in the GDP 2020 year! See the Budget document for the GDP rates over the next 3 years. Many other economies are predicting growth beyond the 2020 contraction within 2 years.
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