Finance minister Tito Mboweni made several announcements in his Medium Term Budget Policy Statement (MTBPS) on Wednesday (28 October) which will likely have a direct impact on the pockets of South Africans, says Hannes van den Berg, chief executive at Momentum Consult.
In an analysis of Mboweni’s speech, van den Berg said that South Africans will be directly affected by the points raised by the finance minister, specifically:
- Tax hikes;
- Possible further credit rating downgrades, leading to rand weakness, impacting prices;
- Weak growth forecasts mean South Africans will get poorer in real terms;
- All workers will be able to get tax deductions on contributions to provident funds;
- Workers will get additional social protection, such as a fund to cover those excluded from pension coverage;
- There are plans to introduce new legislation to allow pre-retirement withdrawals;
As a bonus-through-omission, prescribed assets were not raised as a method to plug South Africa’s growing budget deficit, which will be good news for savers.
These are explained in greater detail below:
1. Tax hikes
The most obvious impact will be felt through the introduction of planned tax hikes.
“Although the detail will only be announced during the 2021/2022 budget speech, the proposed increase of R5 billion additional tax revenue in 2021/2022, to R15 billion in 2024/2025 will have a negative impact on the after-tax salaries of individuals, earnings of companies, dividends to shareholders and value of deceased estates,” he said.
These tax hikes could hit harder than expected, given that South Africa’s projected budget deficit now stands at R707 billion and faces the real possibility of further downgrades by credit rating agencies.
2. Ratings downgrade
Despite the negative downgrade by rating agencies over the past couple of years, South Africa runs the risk of being further downgraded to proper junk status, van den Berg said.
“This will further increase the interest burden on government and send the rand into further weakness,” he said.
Broadly, further downgrades make it even more expensive for government to raise capital in the market – but the consequences of these moves, such as rand weakness, invariably trickle down and hit consumers.
Rand weakness hits importers particularly hard, which results in higher prices for goods and services – while also causing knock-on effects to things such as fuel prices.
3. We’re getting poorer
Van den Berg said that the budget deficit is compounded by South Africa’s weak growth forecasts with the economy now expected to grow by 3.3% in 2021, 1.7% in 2022 and 1.5% in 2023. He said that that South Africa and all its citizen are getting poorer.
“Investors have experienced muted equity returns over the past five years, and the latest economic growth forecast for South Africa does not bode well for future equity returns either. “Pensioners will, in particular, be hard hit, by low-interest rates coupled with low equity returns.”
4. Pensions and retirements
Mboweni announced several changes in the budget which will have an impact on the retirement and pension plans of some South Africans – specifically that government had reached an agreement with its Nedlac partners around the annuitisation of provident funds.
“In the area of social protection, we are happy to announce a historic agreement with all Nedlac constituencies for the annuitisation of provident funds beginning in March 2021, which will enable all workers to continue to enjoy tax deductions on their contributions.
“We thank the labour constituency for identifying appropriate annuity products for low-income workers,” the finance minister said.
Rowan Burger, head of Client Strategy at Momentum Investments, said that this news is welcome as the proposals to try and streamline pension and provident funds have finally been given effect.
“Given the generous concession given, the purchase of annuities only applies to future contributions and persons younger than 55 now, meaning the benefit of this proposal will take a long time to be seen in our annuity sales,” he said.
“We had asked for a communication plan to alert pension fund members to this change, but there is no mention of this.”
5. Social protection
Mboweni said that the Nedlac partners had also agreed on additional social protection for informal workers.
“The Nedlac constituencies also agree to accelerate the introduction of auto-enrolment for all employed workers, and the establishment of a fund to cater for workers currently excluded from pension coverage, as an urgent intervention towards a comprehensive social security system,” the finance minister said.
Treasury has for several years believed auto-enrolment would improve coverage, said Burger.
“We have highlighted that the coverage gap is primarily informal and atypical workers. This fund is seen by those in Department of Social Development as a precursor to the National Social Security Fund.
“From a business perspective ,we recognise we simply cannot provide a low-cost solution in this space but need the boundaries to protect the existing system.”
7. Pre-retirement withdrawals
Mboweni also announced plans to introduce new legislation to allow pre-retirement withdrawals.
“Government will present legislation next year to allow for limited pre-retirement withdrawals under certain circumstances linked to mandatory preservation requirements,” said Mboweni.
The request by labour for immediate access to retirement savings over the initial Covid-19 period highlighted a rigid system that could not easily allow for this,” said Burger
“It did however present an opportunity for a future system that allows access but then also compels preservation. From the positivity, in the statement, it seems to have received broad support from labour.”
Bonus: No prescribed assets
Commenting on the key announcements made in the budget, Reza Hendrickse, portfolio manager at PPS Investments, said that the finance minister delivered a reasonably balanced budget under the circumstances – without any major surprises or glaring own-goals.
“Important issues such as the public sector wage bill and state-owned enterprises were addressed in passing, however, a fair amount of emphasis was placed on the fiscal measures being implemented to realign the composition of spending from consumption towards investment.”
“Savers will be relieved to hear that prescribed assets remain unlikely to be used to fill a funding gap.”
Instead, as anticipated, National Treasury is focused on trying to reduce debt servicing costs, which at current yields is crowding out most investments, and making it hard for the government to prioritise anything else, said Hendrickse.