Finance minister Tito Mboweni has delivered the 2021 budget, detailing how National Treasury intends to navigate an increasingly precarious financial position amid the Covid-19 pandemic and subsequent economic fallout.
National Treasury said that the effects of the Covid-19 pandemic are far-reaching and long-lasting, and thus the budget’s main goal was to balance revenue and spending in an uncertain environment.
“On one side is a raging pandemic that has led to the most severe global economic contraction in nearly a century. At the time of writing, Covid-19 has claimed the lives of 2.5 million people, including about 50,000 South Africans.
“On the other side is a weak economy, with massive unemployment, that is burdened by ailing state-owned companies, the highest budget deficit in our history and rapidly growing public debt.”
In this environment, the budget has offered some tax relief, while expanding spending on health – particularly the Covid vaccine rollout – but has warned that the success of its financial plans hinges on big items like reversing the degradation of state-owned companies and cutting the wage bill.
State of the economy
South Africa is expected to raise R1.36 trillion in revenue in the next financial year, against expenditure of R2.05 trillion. This leaves a budget deficit of just under R690 billion for the year or 14% of GDP.
Treasury projects real economic growth of 3.3% this year, from a low base of -7.2% in 2020.
Household consumption is expected to rebound in 2021/22, but investment is expected to decline for the third consecutive year as a result of persistent electricity interruptions, low confidence and low capital spending by public corporations.
One of the key changes South Africans will take note of is the withdrawal of tax proposals.
In 2020, to address growing concerns over revenue collection, Treasury pencilled in R40 billion in new taxes over a three year period. This has now been withdrawn.
This is as a result of higher tax revenue estimates at the end of last year, which were higher than projected in October 2020. While this is the case, Treasury notes that revenues are still R213.2 billion lower than projected in the 2020 budget.
Despite this, “to support the economy, R40 billion in previously proposed tax measures will be withdrawn,” it said.
However, there will be increases to existing taxes, such as an 8% increase in alcohol and tobacco excise duties, and another 26 cents per litre added to the fuel levy.
Taxpayers will get some relief, though, with tax brackets being adjusted upwards at a rate higher than inflation.
Other notable tax changes:
- To support the shift to a greener economy, the government will differentiate levies on fossil-based and bio-based plastic bags. Plastic bags are currently taxed at 25 cents/bag. A reduced levy of 12.5 cents/bag will apply to bio-based plastic bags.
- The carbon tax rate increased by 5.2%, from R127 to R134 per tonne of carbon dioxide equivalent, from 1 January 2021. The levy for 2021 will increase by 1 cent to 8 cents/litre for petrol and 9 cents/litre for diesel from 7 April 2021.
- Following the recommendations of the Davis Tax Committee, SARS will focus on consolidating wealth data for taxpayers through third-party information. This will assist in broadening the tax base, improving tax compliance and assessing the feasibility of a wealth tax.
Questions around Covid-19 vaccines – how much they will cost, and who will be paying – have been raised in recent weeks.
According to Treasury, access to vaccinations will be provided free of charge, in line with the government’s three-phase rollout schedule. Funding for vaccine procurement and rollout will be drawn from the national budget.
“Since the state is procuring vaccines on behalf of both the public and private sectors, some revenue will return to the fiscus when private providers buy vaccines from the state,” it said.
Over the medium-term, R9 billion will be allocated for vaccine rollout. Of this amount, the Department of Health is allocated R6.5 billion to procure and distribute vaccines.
An amount of R100 million will be transferred to the South African Medical Research Council for vaccine research. Provincial health departments have been allocated R2.4 billion to administer vaccines.
Government allocated R1.3 billion in the current year for vaccine purchases. Given the uncertainty around final costs, an estimated R9 billion could be drawn on from the contingency reserve and emergency allocations, bringing total potential funding for the vaccination programme to about R19.3 billion.
Additional Covid measures are also being covered. Specifically, the special Covid-19 social relief of distress grant has been extended for an additional three months, as are unemployment benefits under the temporary employment relief scheme.
To boost short-term employment, R11 billion is being added to the spending framework in 2021/22 to fund the public employment initiative.
Treasury’s budget estimates show that South Africa will reach a primary surplus in 2024/25 – where revenues will be larger than expenditure. However, there is a big catch: the wage bill.
Public-service compensation absorbed 41% of government revenues in 2019/20 and 47% of revenue in 2020/21, Treasury noted, adding that allowing the wage bill to continue rising in line with recent trends is not sustainable.
Compared with the 2020 budget, main budget non-interest expenditure will be reduced by R264.9 billion, or 4.6% of GDP, over the three-year MTEF period. Most of these adjustments are due to the government’s plans to cut the wage bill.
In 2020, government chose not to implement a wage increase for the year – a decision that was reaffirmed by the Labour Appeal Court.
Despite potential challenges this move still faces, government is holding the line and said it will approach negotiations with workers from a position that “aligns with the fiscal position and prevailing economic conditions”.
The 2021 budget proposes a significant moderation in spending on the consolidated wage bill, which grows by an average of 1.2% over the medium term.
Another stumbling block comes from state-owned companies, which remain a drain on the fiscus.
“In 2020/21, the financial performance of state-owned companies deteriorated. The Land Bank defaulted on its debt and several other companies are at risk of default.
Denel, Eskom and South African Airways remain reliant on state support, including guarantees that enable them to access funding,” Treasury said.
Listed as one of the key risks to the budget proposals, Treasury said that medium-term debt redemptions of state-owned companies total R182.8 billion.
As long as state companies keep running inefficiently, and things like the e-toll saga drag on, the stress they add to the economy will worsen.
“Without rapid improvements in financial management and the resolution of longstanding policy disputes – including the user-pays principle – state companies will continue to put pressure on public finances,” it said.
The total amount for approved guarantees to state-owned companies is expected to increase by R96.2 billion to R581 billion by the end of March 2021, with associated exposure estimated to decrease by R3.4 billion to R410.3 billion.
- Eskom: Remains dependent on government support and continues to use debt to pay operational costs. Government provided R56 billion to Eskom for 2020/21 and allocated R31.7 billion for 2021/22.
- Transnet: Reported a net profit of R3.9 billion, down from R6 billion in the prior year as the value of its property investment portfolio declined.
- SAA: In the 2020 budget Review, R16.4 billion was set aside for SAA over the MTEF period to settle legacy state-guaranteed debt and associated interest costs. Of this amount, R10.3 billion was allocated in 2020/21, with R4.3 billion and R1.8 billion to be allocated in 2021/22 and 2022/23 respectively. The 2020 MTBPS included an allocation of R10.5 billion for SAA in 2020/21. In September 2020, the business rescue plan was amended, and the identified funding requirement was increased to R19.3 billion.
- Denel: Recorded a loss of R2 billion in 2019/20. Despite state funding, the military and aerospace equipment company has made little progress in its turnaround and continues to deteriorate financially.
- ACSA: In 2019/20, ACSA reported a net profit of R1.2 billion and reduced its debt exposure. However, it has been severely affected by Covid-19.
- SABC: Recorded a loss of R511.4 million in 2019/20. After receiving an equity injection of R3.2 billion in the 2019/20 Adjustments Budget, the corporation has made some progress.
- SANRAL: Until the user-pay policy for roads is fully implemented, SANRAL will continue to have limited access to capital markets to fund its toll roads. Shifts in transfers to SANRAL in previous years ensured that it met its financial obligations, but compromised the quality of the non-toll network.