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Budget: Mboweni pegs recovery hopes on vaccine efficacy, lower public wage increases

Finance Minister Tito Mboweni on Wednesday granted South Africans tax relief by withdrawing planned hikes, but remained firm on reining in public wages. He tabled a second pandemic-time budget that tries to trim runaway debt and the deficit, at the same time as boosting recovery.

After an estimated 7.2% GDP contraction last year, the prospects of cultivating growth depend on the efficacy of economic stimulus measures and the country’s fledgeling Covid-19 vaccine roll-out — and the extent to which it allows a full reopening of the economy, the minister said.

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“We are allocating more than R10-billion for the purchase and delivery of vaccines over the next two years,” Mboweni told the National Assembly. 

However, he cautioned that the roll-out was likely to gather pace only in the second half of the year; hence, the threat of further waves of infection continue to cloud the treasury’s forecast on key indicators.

It is predicted that the country will experience real economic growth of 3.3% in the current year, off the low base of last year’s historic lockdown shrinkage, followed by 1.9% in the outer years.

The treasury said the budget deficit should narrow from a record 14% of GDP in 2020-21 to 6.3% in 2023-24, and undertook to stabilise its debt at 88.9% of GDP in four years.

The treasury has set out two modelling scenarios, depending on how the government proceeds with reforms and the vaccine roll-out. The first scenario envisions fiscal and economic reforms, leading to electricity stability, higher investment and a lower sovereign-risk premium and borrowing costs.

The second, more dire scenario, speaks of limited vaccine efficacy this year, leaving the country severely vulnerable to two more waves of the Covid-19 pandemic and renewed restrictions. In this case, in which vaccination has a measurable impact only in 2022, growth this year reaches only 1.6%, and South Africa experiences a prolonged production slump. 

“The negative risks to the outlook continue to outweigh the positive, with new waves of Covid-19 infections and associated disruptions to economic activity posing the most serious risk to growth,” the finance minister said. 

Mboweni warned that debt costs now consume 19.2% of tax revenue and pose a real risk to the fiscal outlook. 

He conceded that his hopes of lowering spending and borrowing hang “heavily” — one might say uncertainly — on containing public compensation growth at 2.1% this year and 1.2% in the outer years.

Meanwhile, trade unions are heading to the Constitutional Court to overturn a labour court loss in challenging the government’s refusal to implement wage increases last year. The treasury signals in the budget review that it wants to review occupation-specific dispensations and is working on abolishing allowances and benefits, including bonuses and annual cost-of-living adjustment.

If the government were to be politically strong-armed into a three-year, inflation-related wage-increase agreement — such as the last in 2018 that it finally halted — it would be left with a compensation shortfall of R132.7-billion or 2.2% of GDP, the treasury said.

Tax revenue looks set to come in at R213.2-billion below original estimates. However, the figure is R99.6-billion better than feared in October when Mboweni tabled the medium-term budget policy statement, after collection on personal and corporate income taxes recovered at the end of 2020.

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Mboweni termed Wednesday’s budget a balancing act between providing support for the economy and for a population left poorer and more unequal by two waves of the pandemic, and shoring up public finances.

In this context of job losses and pay cuts, the treasury concluded that tax hikes would be counterproductive; instead, Mboweni announced a 1% corporate tax cut.

The corporate income tax rate will be lowered to 27% for companies with years of assessment commencing on or after 1 April 2022.

“Covid-19 has led to many business closures and job losses. To support households, businesses and the economic recovery in the context of relatively high income-tax rates, the government will not introduce measures to increase tax revenue in the 2021 budget, and previously announced increases over the next three years will be withdrawn,” the finance minister said.

These tax measures were announced in June when Mboweni tabled a special-adjustments budget in response to the health crisis, and would have generated R40-billion. The loss to the fiscus is offset by the revenue collection recovery experienced in October and December, driven in part by mining corporate taxes recovering as commodity prices rose.

Mboweni announced further relief in the form of a 5% increase in personal tax income brackets. This windfall for taxpayers will cost the fiscus a further R2.2-billion. 

However, the fuel levy will rise by 15c a litre for petrol and diesel and the Road Accident Fund levy by 11c a litre. 

Taxes on alcohol and tobacco products will increase by 8% — bad news for two industries dealt heavy blows by trade restrictions linked to the pandemic.

According to the budget review, the alcohol industry has been granted R4-billion in tax-deferral relief in the last month and this would continue through to the next fiscal year.

Treasury’s tax philosophy has been recalibrated to phase out incentives to individuals and companies, in favour of lowering the overall corporate tax rate over the medium term to encourage competitiveness and growth. 

Similarly, it plans to lower the private income-tax rate over time “by increasing the tax base through greater economic growth, employment and tax enforcement”. Here, the threshold to qualify for a tax rebate on a retirement annuity almost doubles from R8 000 to R15 000 in annual contributions.

The South African Revenue Service will be allocated an additional R3-billion to modernise its infrastructure and use of analytics to strengthen its enforcement role, bitterly damaged during the state-capture era.

Mboweni’s three largest allocations to state entities will be R31.7-billion for Eskom, R6.1-billion for SAA and R5-billion for the Land Bank. The bank, which received R3-billion last year after it defaulted on loan obligations, will receive an additional R1-billion annually for the next two financial years.

The finance minister’s economic recovery imperatives follow those outlined in the state of the nation address 10 days ago, with electricity stability topping the list as Eskom battles a generation shortfall of 5 600 megawatts and tries to secure new debt of R62.8-billion this year and next.

Mboweni’s second imperative is putting money into employment initiatives, after 1.7-million jobs were lost last year and official unemployment reached 32.5%.

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To this end, the budget allocates R11-billion in funding to boost short-term employment — adding to R82-billion spent since last year and nearing the promised target of R100-billion. 

Together with funding to fight Covid-19, this makes up the main drivers of slightly higher state spending over the next two years.

Over the medium-term, non-interest spending drops well below the estimates Mboweni tabled a year ago before the pandemic struck, but the large reductions this entails are again “mainly in compensation”.

Mboweni indicated that South Africa converted $4.6-billion of the $5.6-billion it borrowed from the International Monetary Fund, the New Development Bank and the African Development Bank last year to “fund domestic commitments”.

It would continue to explore lower-cost loans from international financial institutions to meet its foreign currency obligations.

“Honourable Members, an incorrect notion has taken hold that government is ‘swimming in cash’,” Mbowenin told MPs. 

“Certainly, compared to last October, we are in a better place. But our assessment from the supplementary budget in June last year still stands: our public finances are dangerously overstretched. Our borrowing requirement will remain well above R500-billion in each year of the medium term despite the modest improvements in our fiscal position.”

Read Mboweni’s speech below:

Budget Speech Mboweni 2021 by Mail and Guardian on Scribd

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