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South African Budget does not raise any new taxes
February 26, 2020, 4:36 pm

“Our economy has won before, and it will win again” –  Finance Minister Tito Mboweni Budget Speech February 2020

“This Budget is about cleaning up our house,” Finance Minister Tito Mboweni said

In his briefing to journalists before his Budget Speech, Finance Minister Tito Mboweni pointed out that preparing a Budget Speech was an iterative process, as he would propose certain things and his team would either accept or reject them. In the event, the speech that was given to journalists was labelled version 10.

“This Budget is about cleaning up our house. It is very far from austerity, as we are not closing schools or hospitals. We have decided not to raise any new taxes as we push for growth,” he said at the media briefing.

“Those economists who expected a Value-Added Tax (VAT) rate increase will be disappointed, but it would have been foolhardy to increase the VAT rate now. Our focus instead will be on addressing the scourge of wastage and corruption,” he added.

In the 2018 Budget the government announced that it would raise the Value-Added Tax (VAT) rate from 14 per cent to 15 per cent, which puts it on a par with neighbouring states. That was the first VAT rate increase since 1993 and the first done by an African National Congress government. It added around R23 billion to revenue every year.

He was in a jovial mood at the media briefing and his Budget Speech had a similar positive tone as he referenced Miss South Africa, who became Miss Universe last year, the Springbok rugby team, which won the Rugby World Cup in Japan last year and the Proteas cricket team which beat the Australian cricket team this week as he was preparing his Speech.

“In the five years from 2003 to 2008, growth averaged around 5 per cent, and South Africa was amongst the fastest-growing major economies. The unemployment rate improved by 5 percentage points.  Now, even after a decade of weak economic performance, South Africa still boasts deep and liquid capital markets, strong institutions, the most diversified economy on the continent, and a young population.  We are part of the most vibrant continent in the world. As Pliny the Elder said: ‘Ex Africa semper aliquid novi’. Winning requires hard work, focus, time, patience and resilience,” he said in his Budget speech.

Despite the positive tone, Treasury reduced its GDP growth forecast to 0.3 per cent for 2019 from the 1.5 per cent forecast a year ago. It now expects GDP growth of  0.9 per cent in 2020 from 1.7 per cent forecast a year. It has remained conservative in its forward projections and forecasts 1.3 per cent in 2021 and 1.6 per cent in 2022.

Treasury noted that the impact of low growth on revenue collection has been considerable and it now expects to collect R63.3 billion ($4.2 billion) less revenue than projected at the time of the February 2019 Budget. Furthermore it does not expect the debt to GDP ratio to stabilize over the medium term, with debt-service costs now absorbing 15.2 per cent of main budget revenue and the expectation that it will shortly be the single largest expenditure item.

Treasury said halting the fiscal deterioration required a combination of continued spending restraint, faster economic growth, and measures to contain financial demands from distressed state-owned companies. Therefore as a first step, the 2020 Budget makes net non-interest spending reductions of R156.1 billion ($10.3 billion) in total over the next three years compared with last year’s budget projections. This includes large reductions to the public service wage bill, which will probably be fiercely resisted by the civil service trade unions. Treasury noted that the voluntary retirement scheme proposed last year had received a very muted response with only the Police Service seeing a significant uptake.

Non-interest expenditure is forecast to grow at 3.8 per cent over the next three years, down from an average of 8.4 per cent over the past three years.  The reduction in state expenditure is equivalent to 1 per cent of GDP per year.

The proposed adjustments to expenditure mean that the government keeps to its expenditure ceiling.

Treasury said that to achieve faster economic growth, South Africa required structural reforms in a number of areas. Most urgently, the regulatory path should be cleared to enable the private sector to generate electricity, contributing both financial and technical capacity to the country’s energy needs.

In that respect, Treasury officials told The BRICS Post that the commitments made at the 2018 and 2019 Investment Summits had not been factored into their GDP growth forecasts. In addition that did not include any investment that would flow from bid window 5 for renewable energy.

In other areas, cumbersome and unpredictable regulatory frameworks are undermining private investment. The President’s State of the Nation Address made several announcements in this regard, and more decisive steps will be required in the months ahead.

The bottom line is that until the economy starts “winning” again, the debt metrics will continue to deteriorate.

Helmo Preuss in Pretoria, South Africa for The BRICS Post