“This is a budget that plants a seed for renewal and growth” said the South African Minister of Finance, Tito Mboweni, in his Budget Speech on 20 February 2019. The budget was premised on six fundamental policies, focusing on economic growth, the creation of jobs, increased tax collection, a reduction in government spending and debt, the reconfiguring of State-Owned Enterprises (SOEs) and management of the public sector wage bill.
The first budget policy outlined the need to achieve a higher rate of inclusive economic growth and create jobs by restoring private sector investor confidence in the country. The levels of growth South Africa requires to make significant gains in job creation will not be possible without new investment.
The inaugural Investment Conference held last year attracted ZAR 300 billion in pledges from South African and international investors, demonstrating a large appetite for investment, which the government hopes to secure.
The Presidential Jobs Summit last year resulted in concrete agreements between organised labour, business, community and government, as a result of which, the Jobs Fund has created over 200,000 jobs since its inception and disbursed ZAR 4.6 billion in grant funding. The allocation to this fund will be increased to ZAR 1.1 billion over the next three years. In addition, industrial business incentives will support 35 500 existing jobs and create 25 000 new jobs over the next three years.
The employment tax incentive, which benefits young workers will be extended to 2029 and the income eligibility thresholds for this incentive scheme will be increased.
The second policy proposal was not to increase tax rates but rather to focus on increasing tax collections, by not adjusting for inflation, which have declined as a result of weak economic growth (which has, in turn, led to lower personal income tax and corporate income tax revenues). The specific plans to improve efficiencies at the South African Revenue Service (SARS) include the appointment of a new Commissioner, the re-establishment of the Large Business Centre, strengthening the IT team and systems, and implementing recommendations arising from the Nugent Commission of Inquiry.
In addition, recommendations relating to the creation of an inspector-general for tax administration will be considered. Although income tax rates will not increase, the tax measures are designed to raise an estimated ZAR 15 billion in revenue, of which approximately ZAR 13.8 billion will derived from direct taxes i.e. personal income tax and corporate income tax. As there will be no changes to personal income tax brackets, it means that where inflation pushes income into higher tax brackets, the result is an increase in income taxes. The remaining ZAR 1.2 billion will be funded from indirect taxes (i.e. excise duties, fuel levies). Further tax changes are proposed to raise an additional ZAR 10 billion in 2020/21, the details of which will be set out in the 2020 Budget.
The government has taken steps to adjust baseline expenditure downwards by ZAR 50.3 billion over the medium term. Half of these reductions come from adjustments to government spending on compensation and ZAR 12.8 billion comes from reducing spending on specific programs.
The government’s third policy proposal is spending only reasonable expenditure of ZAR 5.87 trillion over the next three years, which expenditure is to be allocated between learning and culture (ZAR 1.2 trillion), health services including NHI (ZAR 717 billion) and social development (ZAR 900 billion).
In 2019, revenues of ZAR 1.58 trillion are expected, whilst spending is expected to be ZAR 1.83 trillion, resulting in a budget deficit of ZAR 243 billion. South Africa is currently borrowing about ZAR 1.2 billion a day (excluding the weekends) and incurring interest of about ZAR 1 billion a day and therefore stabilising and reducing debt is the fourth policy proposal made by the Minister, so that by 2023/24, gross national debt will stabilise at about 60% of GDP.
The Minister recognised that SOEs pose very serious risks to the fiscal framework and posed the question that all South Africans have been asking: do we still need these enterprises? The reconfiguring of SOEs is the fifth policy proposal presented, starting with Eskom. The government will set aside ZAR 23 billion a year for three years to financially support Eskom during its reconfiguration process.
This support is made conditional upon Eskom appointing a Chief Reorganisation Officer (CRO) because as the Minister said: “Pouring money directly into Eskom in its current form is like pouring water into a sieve”. The conditions under which the government will provide guarantees for all other SOEs will also be restricted and if an SOE applies for a government guarantee it too will be required to appoint a CRO. The expiration dates on these guarantees will also be strictly enforced in future.
The last policy proposal made was managing the public sector wage bill, which the Minister acknowledged was currently unsustainable. The national and provincial budgets over the next three years plan to be reduced by ZAR 27 million. The first step in this wage bill reduction is to allow older public servants to retire early saving nearly ZAR 20.3 billion over three years. The next steps will be to, over time, limit overtime payments and bonus payments as well as pay progression.
Finally, the Minister accepted that South Africa has been grappling with corruption and was emphatic that it must be rooted out.
AUTHOR: Arnaaz Camay, Senior Executive in the Tax Practice, Baker McKenzie Johannesburg