Soft election budget could lead to five tough years
The three levers available to South Africa’s finance minister when he tables this year’s National Budget include borrowing more, cutting expenditure or raising taxes. This being an election year, it seems likely the first of the three paths will be favoured over austerity measures or higher taxation. And that means this could be the softest budget for taxpayers to stomach between now and 2029. To find out what you and your clients can expect from National Treasury on 21 February, FAnews tuned into a recent No Ordinary Wednesday podcast.
The outlook is anything but rosy!
“Surging debt is costing South Africa billions in interest while burdened taxpayers are grappling with inflationary pressures, interest rates and the high cost of living,” said podcast host, Jeremy Maggs. He said that runaway government spending was putting unprecedented strain on the public purse and warned that the fiscal shortfall was at an all-time high, before calling on his expert guests to share their insights. Annabel Bishop, Chief Economist at Investec was first to the virtual podium, tasked with explaining the country’s lacklustre growth outlook in light of the latest downward GDP growth revision by the International Monetary Fund.
South Africa’s economic constraints are well-documented and include infrastructure-related electricity supply and logistics challenges; corruption and crime; and restrictive government regulatory policies, to name a few. “Last year was a poor year for South Africa’s economy,” Bishop said, describing a triple-whammy of the highest-ever level of loadshedding, ongoing snafus at ports and railways and weak commodity prices. The Investec economist observed that little had changed since the Medium Term Budget Policy Statement (MTBPS) in October 2023, and that National Treasury faced the same overspending and under-collection dilemma.
Under-collection is inevitable in the context of a struggling domestic economy. To make matters worse, the South African Revenue Services (SARS) will not benefit from the commodity-related tax windfalls that it relied upon in plug the tax collection gap in 2021 and 2022. “There are [major] concerns over inefficient and wasteful expenditure too, with money being spent on programmes and projects that do not yield anything,” Bishop said. One of the biggest issues is that too much is being allocated to current expenditure items such as public sector wages rather than the infrastructure investments that drive growth.
Last year’s MTBPS projected gross loan debt to peak at 77.7% of GDP in 2025-2026, and it looks increasingly unlikely that this number will trend back towards the intended 60% by 2030-2031. Instead, the ratio seems stuck above 70%. “This matters because the sustainable ratio for emerging market debt is around 60% [meaning that] government has moved back sharply from its fiscal consolidation path,” said Bishop. Measures such as debt-to-GDP; debt repayment as a ratio of GDP; and the budget deficit as a percentage of GDP are important measures of a country’s fiscal discipline.
Fiscal versus monetary policy explainer
The podcast dived in and out of both fiscal and monetary policy matters. Fiscal policy involves government borrowing, expenditure and revenue collection while monetary policy focusses on the levers that the South African Reserve Bank (SARB) can pull to deliver on its inflation-targeting mandate. According to Bishop, the hard, sharp interest rate hiking cycle that started in 2021 had contributed to weak domestic growth. In contrast, South Africa’s fiscal policy has been quite expansionary. She noted that monetary policy had to be more restrictive to accommodate government’s borrowing and expenditure.
Maggs asked Tertia Jacobs, Treasury Economist at Investec Corporate and Institutional Banking, about the trajectory of government debt, and what steps might be taken to rein in spending. Jacobs said there were four areas that economists would be watching during the upcoming budget speech. First and foremost, they would look for signs of a reconfiguration of government to cut costs; second, was whether a new fiscal anchor would be announced. “We have had an expenditure ceiling since 2012 but government has been unable to keep to it because of frequent bailouts to state-owned enterprises (SOEs) and a wage bill that rose sharply until 2018,” she said.
Third, economists want a clearer signal from National Treasury about how infrastructure will be funded. Commenting on recent government assistance to Transnet, Jacobs said: “In December 2023, local banks extended a government-guaranteed loan facility to Transnet to help alleviate liquidity pressure in 2024 [plus] there is roughly R100 billion needed for core fixed investment”. Investment into logistics-related infrastructure is non-negotiable because bottlenecks in coal, iron ore and fruit exports are holding back the country’s GDP growth; the negative impact of sub-standard rail on road infrastructure and the cost of moving goods is also well-documented.
No more fiscal ‘wriggle’ room
The fourth and final aspect was to what extent government might ‘raid’ its gold and foreign exchange contingency reserve account. There has been talk that government might use some of this contingency account to reduce debt, with the exact approach still being discussed between the finance minister and the Governor of the SARB. Turning to cost-cutting initiatives, Jacobs reminded Maggs that South Africa did not have the fiscal space to meet any over-the-top election promises. “There will be election promises but it is very unlikely that we are going to see it in the budget numbers,” she said, adding that National Treasury remained committed to fiscal sustainability.
The podcast concluded with Pierre Botha, Wealth & Investment Tax and Fiduciary specialist at Investec being interrogated over potential income tax or VAT increases. “We do not see government increasing the corporate income tax rate or VAT rate, but we may see some tax bracket ‘creep’ that will affect individual taxpayers,” he said. Local households are already struggling due to inflation-linked increases in food and fuel prices and higher personal debt servicing costs. In this context, SARS will have to focus on efficiency gains to collect more.
According to Botha, SARS can improve collections through the ongoing digitization and modernisation of the tax collection system; an increased focus on debt collection and the prevention of illicit trade; and voluntary disclosure programmes for taxpayers. The revenue authority has also recently upped the ante on collecting tax dues from High Net Worth (HNW) individuals with an asset base exceeding R50 million. “We have seen an increase in lifestyle audits which is resulting in a lot of extra taxes for SARS; and [perhaps] in response to South Africa’s recent grey listing, trusts are coming under greater scrutiny too,” Botha said.
No tax relief expected this year
If you were hoping for some tax respite to free up your clients’ funds for insurance and investment purposes, you will be sorely disappointed. “Unfortunately, with the pressure of added revenue collections, this year is going to be a bit tougher for taxpayers; we may even see an increase in the fuel levy which has held steady over the past couple of years,” Botha concluded. “There is not going to be much breathing room on the tax and taxation front this year”.
Writer’s thoughts:
South African households are struggling on both the expense and income fronts. In the former, high inflation and interest rates are pushing the cost of living higher; in the latter, real household income is in multi-year decline. Do your clients have the means to negotiate further tax increases in 2024-2025 and beyond? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
