Budget Speech 2020: how the experts reacted

 ·26 Feb 2020

Minister Tito Mboweni walked the tightrope in delivering his Budget Speech 26 February 2020, says Bernard Sacks, tax partner at audit, accounting, tax and advisory service provider, Mazars.

In an effort to preserve the last remaining investment grade status he had to demonstrate to the ratings agencies that South Africa was applying appropriate measures of fiscal discipline in cutting expenditure and limiting the amounts allocated to underperforming SOEs, whilst not overburdening South Africans with taxes, he said.

There will be somewhat of a relief for South Africans as Personal Income Tax brackets are adjusted above the inflation rate and this means that there will be more money coming into people’s pockets.

Personal income tax

Minister Mboweni announced that the personal income tax brackets and the rebates (primary secondary and tertiary) will increase by 5.2% for the 2020/21 tax year. The bulk of this relief accrues to taxpayers earning up to R750,000.

Although there had been much speculation ahead of the Budget, no VAT increase materialised. “This is welcomed, given the need to stimulate the economy and promote growth,” Sacks said.

Whilst the SA corporate tax rate remains unchanged at 28%, the Budget Review acknowledged that South Africa’s relative competitiveness internationally has lagged over the last several years due to rates in other countries such as UK, India and USA falling.

“Accordingly, in an effort to promote economic growth, government intends, over the medium term, to restructure the corporate income tax system by broadening the base and reducing the rate.

“The base broadening proposals will involve minimising tax incentives, and introducing new interest deduction and assessed loss limitations,” Sacks said.

The intention, he said, is to implement rate reductions in a revenue-neutral manner:

  • Effective years of assessment commencing on or after 1 January 2021, the offset of assessed losses carried forward will be limited to 80% of taxable income.
  • Government proposes to restrict net interest expense deductions to 30% of earnings for years of assessment commencing on or after 1 January 2021.

The benefit of tax incentives is under discussion. Sunset clauses for a number of incentives are to be introduced, while others will be under review.

Exchange controls are to undergo further reforms. Over the next 12 months, a new capital flow management system will be put in place. All foreign-currency transactions will be allowed, except for a risk-based list of capital flow measures, said Sacks.

“This change will increase transparency, reduce burdensome and unnecessary administrative approvals, and promote certainty. The capital flow measures take account of the Organisation for Economic Co-operation and Development best-practice Code of Liberalisation of Capital Movements and are aligned with similar approaches in other developing countries.”

The annual limit for contributions to tax-free savings account will be increased to R36,000 – a measure intended to increase savings.

Some of the indirect tax changes include:

  • Increasing the fuel levy by 25c/litre, consisting of a 16c/litre increase in the general fuel levy and a 9c/litre increase in the RAF levy
  • Increasing excise duties on alcohol and tobacco by between 4.4 and 7.5%.
  • Heated tobacco products will be subject to excise duties with immediate effect
  • Government intends to tax electronic cigarettes in 2021.

A budget for business and  for trade

“There is much to welcome in this budget, particularly action on youth unemployment, some fair steps in creating a fair tax system in support for beleaguered state-owned enterprises,” said EY’s SA tax leader, Ekow Eghan.

“This budget clearly acknowledges that the government has a central role to play in turning SA into a competitive economy and that it is willing to do so. This was also a budget for business and a budget for trade.”

Signalling the corporate tax cut in the future made our tax system more competitive. It means business will be better positioned to grow whilst the economy picks up,” Eghan said.

“It also helps with the broader messaging that SA is open for business. We welcome this budget and believe that it enhances immediate prospects for economic recovery and the economy’s long-term growth prospects. It was a very necessary, credible path to fiscal and monetary balance and we thank the minister for delivering it.”

Mark Goulding, EY Global compliance & reporting partner said that the budget was good for both individuals and companies.

“A clear acknowledgement that SA already has a relatively high tax-to-GDP ratio compared with our peers. This means limited scope for additional tax increases which is what was delivered. SA’s corporate tax rate has not changed for more than a decade and at 28% is high compared to our largest trading partners who are on the mid to low 20%’s.

“Reducing the corporate income tax rate will help to encourage new investment, expand production and assist growth. The budget comments lead us to believe there will be a gradual rate reduction in corporate tax over probably the next 5 years to put us on par with our trading partners,” Goulding said.

Was it enough for Moody’s?

The widespread view coming into this year’s Budget Speech, was that it needed to credibly steer us towards growth, while also addressing the growing fiscal deficit and lowering the debt trajectory. This is no easy task, but is precisely what South Africa desperately needs,” said Reza Hendrickse, portfolio manager at PPS Investments.

“This year’s budget carried an additional burden of needing to appease Moody’s, with our investment grade credit rating hanging in the balance. Finance minister, Tito Mboweni boldly commented that he thought the budget did enough to maintain Moody’s patience, but this is by no means certain,” Hendrickse said.

Expectations ahead of the budget predicted some combination of tax hikes in the major areas (personal, corporate and VAT), expenditure cuts and economic reforms to boost the growth.

“However, no major tax increases were announced. Only a few minor tweaks such as inflationary adjustments to excise duties, fuel levies and a higher plastic bag levy etc.”

This was a far cry from what many had previously predicted; a second VAT rate increase, alongside increased taxes geared towards the wealthy.

“South Africans can look forward to lower taxes, with some personal income tax relief,” said Hendrickse.

Hendrickse said that the minister exceeded expectations with the announcement of a R160 billion adjustment to the wage bill over the next 3 years.

“The bloated public-sector wage bill is widely seen as the most prominent area where expenditure curtailment is needed, so the news was welcomed. The saving could be viewed as ambitious however, and was in fact at the top end of what many had predicted. Regardless, it shows a clear intention to address public sector wages.”

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.

“It is 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,” Hendrickse said.

Good news for property owners

Mike Greeff, chief executive officer of Greeff Christie’s International Real Estate weighed in on how the budget will affect the property sector.

“After almost a decade of weak economic performance, there is still a lot to be positive about – from the deep and liquid capital markets to being the most diversified economy on the continent – it is not all doom and gloom,” Greeff said.

The biggest news for the property industry is that the threshold for transfer duties has been adjusted. Property costing R1 million or less will no longer be subject to transfer duty.

This is welcoming news for all because it makes buying property more accessible, said Greeff. “It’s also great news for those wanting to purchase for more than R1 million because you will save, for example, R17,000 in transfer fees on a R2.5 million home.”

The finance minister also pointed out the growth in employment due to the Job Fund projects.

“To date, the project has created more than 175,000 permanent jobs for the youth and have helped 21,000 young people get into internships. This is a huge positive for the property sector because as young people become financially independent, more and more young adults will be able to qualify for home loans and in turn, become property owners and increase their personal wealth.”

On another positive note, Greeff, said, the pilot of the Help to Buy scheme has supported over 2,000 families to buy their own homes.

“This is significant as the number of homeowners has increased, and it is only expected to increase further throughout the year. In a single year (2019), the Help to Buy scheme has supported nearly R1 billion in new lending therefore aiding in more South Africans being able to own their own home.”

Fuel hikes on the way

The Automobile Association (AA) said it is dismayed at the increases to the General Fuel and Road Accident Fund levies.

The minister announced a combined 25 cents increase to the two main fuel levies: 16 cents will be added to the General Fuel Levy bringing it to R3.63 on every litre of fuel, and nine cents will be added to the Road Accident Fund levy bringing it to R2.07 on every litre of fuel.

This means consumers will pay R5.70 towards these two taxes alone, or around 35% to 40%on every litre of fuel.

“We acknowledge that revenue must be collected towards the fiscus, and the difficult decisions the minister had to make in preparing this Budget. However, as we pointed earlier, the increases to the fuel levies will hurt the poorest of the poor hardest, and will make transport costs that much more expensive for many who rely on transport daily to earn a living,” the AA said.

Another area of concern for the AA is the reduction in spending on transport, particularly public transport spending which will decrease by R13.2 billion over the next three years.

“Access to public transport is access to a job, education, healthcare, and so many other critical services. To reduce spending on public transport – which is already inefficient and unreliable – will make it even harder for many to improve their lives. Curiously, this comes at a time when our country is experiencing its highest unemployment rate ever. In our view spending on public transport should have increased considerably, not decreased,” the association said.

Regarding the increase to the fuel levies, the association noted earlier that a decision to increase the levies, even by a small margin, would be dangerous and damaging.

“These increases will invariably be reflected in increases to public transport and taxi fares. For those in our country who count each cent to get by each month, this is extremely worrying. The financial impacts of the increases cannot be underestimated and we are concerned about how this will impact on these citizens,” it said.

Read: The 2020 budget in a nutshell

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