South Africa takes a step back from the fiscal cliff
There is cautious optimism that South Africa’s fiscal picture is improving after finance minister Enoch Godongwana delivered his maiden budget speech on Wednesday.
Godongwana’s comments were broadly in line with market and analyst expectations – but a few snippets of good news emerged through a freeze on fuel levies, and inflation-linked adjustments to most taxes.
Most analysts, economists and market commentators, as a result, leaned on the side of optimism in their post-budget write-ups.
However, some points of concern remain, including the country’s debt servicing costs, and the risk to the economy of state-owned enterprises.
These are the key takeaways from the speech, from South Africa’s leading commentators:
Proceed with caution
Higher commodity prices, more resilient corporate income and improved collections of personal income tax and VAT combined to ensure tax collections were better than expected, netting the fiscus a R181 billion tax windfall taking revenue to a record R1.5 trillion, said Andrew Duvenage, MD of NFB Private Wealth Management.
“The budget deficit has reduced to 5.7% of GDP rather than the 6.6% anticipated in November 2021’s Medium Term Budget Policy Statement. National Treasury says it remains committed to reducing the fiscal deficit and stabilising debt.”
Commentators warn that there is much to read “between the lines”, and many promises and forecasts need to be tempered against the state’s poor track record of hitting targets and executing budget cuts.
Top of mind for many economists is that the revenue windfalls, as acknowledged by the minister himself, have come from a commodities boost and are not pencilled in as permanent. That this was noted by Godongwana in his speech is a positive mark for the budget.
“Higher tax collections are primarily the result of a boom in the price of commodities. Godongwana is well aware that permanent expenditure cannot be planned on the basis of what is likely to be a temporary increase in commodity prices. While acknowledgement of this fact is positive, it remains to be seen if expenditure creep can be held at bay over time, said Duvenage.
Tax overruns have lifted a weight off of Treasury’s shoulders, and Momentum Investments said that forecasts point to a degree of fiscal discipline.
“A portion of the tax revenue overrun has been directed at reducing the fiscal deficit and lowering the borrowing requirement, while the rest addressed the country’s social challenges.
“Given that the overrun was not completely allocated to an increase in expenditure or used to support larger cuts in taxes suggests an element of fiscal discipline,” it said. “Adhering to the fiscal consolidation framework should result in a positive response from financial markets.”
But these positives do not make up for big issues that continue to hang on the country’s books – notably municipalities and state-owned companies that are still in financial crisis; government wage bill uncertainty; pressure for more social spending; low economic growth; rising unemployment; crumbling infrastructure; government corruption; and the ongoing power crisis, among others.
Jeffery Schultz, senior economist at BNP Paribas said that despite all this, Treasury’s budget and forecast are still erring on the side of conservatism, and lean into growth-generating spending.
“Overall we see scope for a faster fiscal consolidation trajectory than the Treasury has pencilled in over the medium term, which ultimately should continue to prove supportive for the local bond market.”
Duvenage said that Godongwana is aware that the economy continues to face enormous risks. He stressed that without structural reforms to enable economic growth, encourage investment and create jobs, it will be hard to turn the tide.
“It will now be up to the various arms of government to rein in unnecessary expenditure and create a business-friendly environment to encourage investment and restore business confidence. None of these concepts, risks or proposed solutions are new. They have been referenced ad nauseum in the past. The proof will be in the execution,” he said.
The wage bill elephant in the room
While the finance minister expressed his recommitment to cutting the government wage bill, with no concrete buy-in from unions, negotiations ongoing, and court cases still in process, it remains a glaring and significant risk on the books.
Public sector employees will continue to receive the monthly non-pensionable cash payment of between R1,200 and R1,700 until negotiations have concluded, the minister said. In a recently published report, the IMF said it did not believe the state would be able to honour its commitment to rein in the public sector wage bill.
In its budget presentation, Treasury acknowledged that court proceedings over the government’s decision to freeze wages – reneging on a three-year agreement with unions – are still ongoing. If South Africa’s courts rule in favour of unions, this will come at a significant cost to the fiscus.
Momentum Investments noted that not only would a loss in court cost the state billions, it would also lead to significant job losses.
“A legal battle ensuing between public-sector workers and government on the third year of the 2018 wage agreement is likely to be ruled in favour of Treasury. If not, Treasury acknowledged this could add R75 billion in unbudgeted expenditure by FY22/23.
“If translated into headcount reductions, between 30,000 and 35,000 jobs could be affected unless further reprioritisation in the budget is assumed,” it said.
Motorists spared – but a miss for e-tolls
One of the few surprises in the budget speech was the finance minister’s decision to freeze tax hikes on fuel and the Road Accident Fund levy for the year.
Leading up to the budget speech, hikes on these levies were seen by many analysts as a certainty, with warnings that drivers would be crippled by the hikes given the rising fuel prices.
Countering these expectations, Godongwana not only announced a cap on the taxes for the year, but also that Treasury and the Department of Mineral Resources and Energy will launch a full review of the petrol price.
“Following letters, calls and protest action from Outa the AA and others to halt the incessant increases to the fuel levy and RAF levy, we believe the minister heard us and has realised how costly the compounding impact of past levy increases have become in the overall price of fuel,” said Wayne Duvenage, Outa CEO.
Duvenage said that it is the first year of no increases in the general fuel levy and Road Accident Fund levy on fuel in more than two decades, and could be a sign that the government is paying more attention to calls from civil society in this regard.
Where the budget outright failed, however, was to bring any conclusion or guidance to the decade-long e-toll saga. Transport minister Fikile Mbalula promised a resolution to the widely-rejected system in the budget, but it ended up being yet another deadline missed with no mention of the scheme at all.
Good news for homeowners, not so much for those looking to buy
With tax brackets being adjusted in line with inflation, and no real tax hikes on the cards for 2022 – aside from a small bump in the carbon tax – the 2022 budget was a big win for homeowners, who should have more money in pocket to address their big debt items, like home loans.
However, the same cannot be said for prospective homeowners, say property sector leads.
A key takeaway from Lew Geffen Sotheby’s International Realty CEO Yael Geffen, Samuel Seeff, chairman of the Seeff Property Group, and Dr Andrew Golding, CEO of the Pam Golding Property group, was that Godongwana missed the mark on transfer duty exemptions.
The property bosses all noted with disappointment that the threshold for transfer duty exemption was not mentioned or adjusted in the budget speech.
The threshold currently stands for homes purchased for below R1 million. This is an issue because the average purchase price for an entry-level home is now approaching R1.2 million, which presents a significant barrier to entry for first-time buyers.
“Relief for entry-level buyers could go a long way to getting more people into their own homes while the interest rate is so low, and buyers can still secure a higher loan to value bonds,” said Seeff.
Loose threads
Legal firm Webber Wenzel said the budget delivered much-needed relief and clarity on a number of tax questions – especially with a one percentage point reduction in the corporate tax rate, medical aid tax credit increases and a host of other changes.
However, it noted that the finance minister left many other tax questions hanging.
There was no follow-up to last year’s proposal of a deemed retirement withdrawal tax for emigrants. Instead, National Treasury will be renegotiating double tax treaties with countries that have sole taxing rights on retirement benefits of emigrants from this year.
There was also no mention of wealth tax proposals in this budget – although all provisional taxpayers with assets greater than R50 million will be required to declare specified assets and liabilities at market values in their 2023 tax returns.
Questions also remain on how the Covid-19 pandemic will impact both corporate and personal income tax.
“The restructuring of the corporate tax rate on a revenue-neutral basis by limiting assessed loss deductions to an 80:20 split is a concern. If assessed losses equal or exceed current year income, tax is payable on 20% of that income.
“For miners, the assessed losses will be calculated before any capex deductions. Webber Wentzel is concerned that many companies accumulated significant assessed losses in 2020 and 2021 during the Covid-19 lockdowns, and their abilities to claw back those losses will now be restricted,” the firm said.
“We had also hoped for more flexibility for salaried taxpayers to claim deductions for home office expenses to have been implemented. Section 23(b) of the ITA is currently too narrow to provide any relief. Webber Wentzel looks forward to the discussion paper on remote working which the budget promises to circulate this year.”
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