Treasury pivots on budget, scraps tax hikes

By Mike Cohen and Prinesha Naidoo

(Bloomberg) – South Africa signalled a shift in budgetary policy, backtracking on planned tax increases as it switched focus to reigniting the coronavirus-battered economy by bolstering consumption and investment.

Finance Minister Tito Mboweni reversed a decision to raise an extra R40bn ($2.8bn) over the next four years, allocated funds for Covid-19 vaccines and set more ambitious debt-consolidation targets, while sticking to a pledge to freeze state workers’ wages. He also announced inflation-beating relief for individuals, whose taxes have been raised in five of the past six years, and a 1 percentage point cut in corporate tax from April 2022.

Read also: FULL SPEECH: South African Budget 2021

“We agree that tax increases must be kept to a minimum as we stabilise our public finances,” Mboweni said in his budget speech to lawmakers in Cape Town on Wednesday. “We will not rest until we have fundamentally altered the structure of this economy.”

The approach is a stark change from a decade of swelling civil service costs and bailouts to state companies that proved an increasing drain on the economy. It’s the clearest sign yet that President Cyril Ramaphosa is intent on averting a debt crisis and driving through reforms needed to galvanise private investment and tackle record-high unemployment.

Political risk

The pivot toward a lesser role for the state is also politically risky and may suggest the president has stamped his authority on the deeply divided ruling African National Congress, which is preparing to contest local council elections later this year. Ramaphosa’s rise to power in 2018 was backed by the party’s powerful labor union allies that vociferously oppose the three-year moratorium on wage increases and favour even higher taxes for the rich.

While South Africa’s finances remain precarious, the situation isn’t as bleak as it was at the time of the mid-term budget in October, thanks to a commodities boom and a partial rebound in consumption and employment. The economy likely contracted 7.2% last year, the worst in almost a century, but less than the 7.8% previously forecast. It’s expected to expand 3.3% this year and 2.2% in 2022.

Read also: Executive summary of 2021 National Budget Speech

The Treasury expects to collect R99.6bn more in the year through March than it projected four months ago, reducing the forecast for the budget deficit to 14% from 15.7%. Higher excise duties were imposed on fuel, alcohol and tobacco sales and a levy on scrap metal exports was introduced. The corporate tax rate will be reduced to 27% next year, the first reduction since 2008.

The anticipated peak for state debt was reduced to 88.9% of GDP in fiscal 2026. A primary budget surplus, which excludes interest costs, is seen by 2025 – a year earlier than previously announced.

Mboweni committed R10.3bn to buy and administer coronavirus vaccines, an allocation aimed at helping the government meet its target of inoculating two-thirds of the population of 60 million. A further R9bn will be placed in a contingency reserve, and can be used to fund shots if needed.

(Visited 341 times, 1 visits today)