Now is not the time to increase taxes…
South Africa’s Minister of Finance, Enoch Godongwana, took to the podium on 23 February 2022 to deliver his 2022 Budget Speech. The presentation took place against the backdrop of the Covid-19 pandemic, bouts of load-shedding, rising unemployment and slower-than-expected economic recovery… FAnews did a quick ‘whip around’ of market commentators’ impressions immediately following the speech. At first glance, most were happy with the budget’s expenditure and income proposals, with a Moneyweb.co.za poll of four economists and one finance editor awarding the minister a staggering 7.5 out of 10.
The main budget proposals for the 2022/2023 fiscal year
Norton Rose Fulbright offered a short summary of the main proposals, including: the corporate income tax rate is reduced from 28% to 27% for tax years ending on or after 31 March 2023; the VAT rate remains unchanged at 15%; personal income tax brackets and rebates have been adjusted for inflation; excise duties on alcohol and tobacco increase by between 4.5% and 6.5%; no changes to the general fuel levy and Road Accident Fund (RAF) levy; the employment tax incentive will increase by 50% to a maximum monthly value of R1 500 in the first year; and sugar tax will be increased by 0.1% to 2.31 cents per gram of sugar. There were plenty of other experts lining up to share their key takeaways…
Minister Godongwana, according to Carla Rossouw, Tax Lead at Allan Gray, provided some hope by making no significant tax increases for the 2022/23 tax year. “The higher-than-projected revenue performance has offered some breathing room and allowed the minister to provide R5.2 billion in tax relief. Most of the relief is provided through an adjustment in the personal income tax brackets and rebates and is mainly targeted at individuals in the middle-income group. The government remains focused on reprioritising, keeping government expenditure at bay and further bolstering SARS enforcement to improve tax collection, broaden the tax base and improve tax compliance,” she said.
Is there a wealth tax in the future?
There was a somewhat sinister development that could point to a wealth tax being implemented in the future. “The minister also announced that all provisional taxpayers with assets above R50 million will be required to declare specified assets and liabilities at market values in their 2023 tax returns,” said Rossouw. This contrasts with the good news for the very poor, who will see a 12-month extension to the R350 per month Covid-19 relief grant. The budget set aside R44 billion for this initiative. “The success of the 2022 Budget will, therefore, once again depend on how effective government is in holding the line on expenditure, while paving the path for sustainable economic growth,” concluded Rossouw.
Luigi Marinus, Portfolio Manager at PPS Investments said that the National Budget was characterised by the balance between social welfare expenditure and fiscal sustainability, amid a disappointing outlook for GDP growth in South Africa. The estimate for GDP growth for 2021 was reduced from 5.1% to 4.8% and is forecasted to grow at just 1.8% p.a. over the next three years. “The budget deficit for 2021/22 is estimated at R355 billion or 5.7% of GDP and forecast to decline to 4.2% of GDP by 2024/25; however, it is expected to first increase to 6.0% of GDP in 2022/23,” said Marinus.
The 2021/22 revenue estimate increased by R182 billion from the last budget estimate, largely made up by the R105 billion increase in corporate income tax, R37 billion increase in personal income tax and R13 billion increase in VAT collections. The increase in corporate income tax was primarily as a result of the increased revenues in the mining sector as commodity prices increased over the year. “The finance minister stressed that this was more likely a once-off increase and cannot be utilised to cover permanent expenses; this allowed for R5.2 billion in tax relief with tax brackets and rebates adjusted by 4.5%, resulting in the tax-free threshold increasing from R87 300 to R91 250 and confirmation that corporate tax is set to decline,” he said.
Fiscal concerns: debt remains an issue
According to PPS Investments, “debt remains an important budget consideration with government debt having reached R4.3 trillion and expected to increase to R5.4 trillion in the medium term, which translates to debt servicing costs of R330 billion per annum over this period. The debt service cost is now greater than any of the individual functional and economic budget classifications with R3.7 billion more budgeted for interest payments than basic education! On a positive note, the debt-to-GDP ratio has moderated to peak at 75.1%, which is 3% lower than the peak expected at the time of the October 2021 mid-term budget policy statement (MTBPS).
“State-owned enterprises (SOEs) have received R308 billion in bail-outs to date, but strict measures will need to be adhered to for additional funding to be approved. Eskom is, however, assured of an additional R88 billion over the next four years to assist in financial sustainability by reducing their debt burden,” commented Marinus. “While some SOEs will be retained in their current state, rationalisation or consolidation among SOEs is expected”. It is also worth noting that “public-private partnerships are expected to increase with the goal to improve infrastructure development and provide much needed jobs in areas where projects are conducted”. Marinus pointed out that changes to Regulation 28 of the Pensions Fund Act were set to be gazetted in March 2022. These changes will, among other things, allow retirement funds to increase their investments in infrastructure projects.
Short-term insurer weighs in…
“This year’s Budget was very positive, especially since the risks facing our country and the short-term insurance market are becoming increasingly complicated to manage; we [especially] welcome the bounce-back scheme to support SMEs,” said Garth Napier, MD at Old Mutual Insure. Government announced R17.5 billion spend over the medium term to support infrastructure projects, which will be important for driving job growth and employment. It has also committed R76 billion to job creation programmes over the medium term. Government’s commitment to support Eskom was also good news.
“This support is especially important as we are getting more and more concerned about the likelihood of grid collapse, something that our economy and insurance sector cannot afford,” he said. And of course, the non-life insurance sector is appreciative of the state’s role as insurer of last resort in the riot and strike protection market. “We are very happy that government will be providing Sasria with R7.1 billion in funding [because recapitalising the special risks insurer] and ensuring it is a stable entity is critical for all of insurance customers with Sasria cover,” concluded Napier.
A ratings and market perspective
“The overall message of unflinching commitment to fiscal consolidation in the 2022 Budget is positive from both a ratings and market perspective,” said Johann Els, Economist at Old Mutual Investment Group, who was also the most positive economic commentator polled by Moneyweb.co.za. “It may have been boring, but boring is good,” he said.
Els expected positive news from ratings agencies following the budget: “Moody’s could potentially upgrade their current negative outlook to stable in the near future”. This was due to the fact that the debt ratio’s forecasted peak of 75.1% was way better than the previous peak, predicted at 95.3% in the October 2020 MTBPS. Els concluded that the 2022 Budget was both bond- and equity-friendly.
Baker McKenzie's tax team also analysed the Budget with an overview on corporate tax, international tax, VAT, carbon tax, as well as customs and excise, other indirect taxes, tax administration and exchange control.
General, health and retirement
Discovery executives provided comments on Budget 2022, which FAnews readers will benefit from reading. “The budget is starting to give effect to the President’s recognition that it is both small and large businesses that create jobs; we now need to keep improving the ease of doing business to unleash the private sector’s full potential to help build our country,” said Adrian Gore, Discovery Chief Executive.
Dr Ryan Noach, CEO of Discovery Health added: “We welcome the increased fiscal allocation to provincial health departments [and] are hopeful that this can build towards an integrated health system to enhance access to high quality, affordable care and improved clinical outcomes for all South Africans.” On retirement funds, Guy Chennells, Head of Product: Discovery Employee Benefits said, “We’re pleasantly surprised to see that retirement funds will have the freedom to invest up to 45% offshore, from the prior 30% limit”.
There are some pressing issues!
Several issues are also obvious from the 2022 Budget, according to Alexander Forbes Investment’s economists. One of them is that medical tax credits will increase from R332 to R347 per month for the first two members, and from R224 to R234 per month for additional members.
Momentum experts shared their concerns and thoughts on this year’s Budget, with Mike Adsetts, Deputy Chief Investment Officer at Momentum Investments mentioning that, “other than reiterating that there would be an extension in the social relief or distress grant for another 12-month period, the minister did not indicate how a more formal, permanent arrangement would be structured and how it would be financed”.
Adsetts made two additional points. The first, that “with public sector wage negotiations still underway, the minister merely reiterated the state’s inability to fund any overrun and suggested a reprioritisation of spending or headcount reductions at a departmental level would be necessary to accommodate any above-budget increases in the wage bill.” And the second, that while “government had echoed its “tough love” sentiment towards SOEs, this left markets concerned about adding to government’s debt burden in the longer term”
In its concluding remarks, Norton Rose Fulbright summed up that government’s steadfast commitment to restoring sustainability to the public finances was supported by better-than-expected revenue collections. The Budget Review recognises that government’s chosen fiscal path will not be easy, but it is intended to support higher levels of economic growth and to enable the country to reduce its overall debt burden.
Writer’s Thoughts:
There were sighs of relief following Godongwana’s speech, which contained no significant tax increases. There are, however, some concerns. As the Momentum experts mentioned, the zero increase to RAF levy exacerbates the fund’s already significant liability issues. Also, while there is much-welcomed real personal tax relief in the budget, the burning question remains where cash-strapped, indebted South Africans find money to save? Share your thoughts on Budget 2022. Please comment below, interact with us on twitter at @fanews_online or email me your thoughts [email protected].
