By Bryden Morton, B.Com (Hons) Economics, Executive Director and Chris Blair, B.Sc Chem. Eng., MBA – Leadership & Sustainability, CEO.
Minister Mboweni opened the 2019/2020 South African budget speech by bringing along a typical South African plant, the Aloe, and painting a picture of how this Aloe came to be. He said that we must sow the seeds of renewal and growth, cultivate the soil and protect the plant from the elements and pests by pruning away the rot. Although used as a metaphor, the metaphor is clearly referring to stopping corruption and state capture efforts – something that has directly affected You in South Africa
The budget speech was dominated by concerns over South Africa’s rising debt to gross domestic product (GDP) ratio, as well as the poor financial state of a number of state owned entities. These issues provide a conundrum for the Finance Minister as he would need to seek additional funding from an already strained tax base. In an election year, major changes to the tax structure tend to be put off until after the election has passed. The entire budget speech lived up to the expectation that no drastic changes would be implemented (from a tax point of view) and that it would be a somewhat neutral budget – the main points impacting You in the economy include:
- Personal Income Tax: Although a slight adjustment to the tax threshold of the income tax bracket has been made, the remainder of the brackets have remained unchanged. The impact of this is that You may experience a slight bracket creep – this means if You move into a new income tax bracket because of a salary increase then You will pay more tax. The impact of this creep should be relatively neutral to individuals given South Africa’s progressive tax system because You earn more money in the new bracket.
- Fuel Levies: The fuel levy will increase by 30c per litre for petrol and 29c per litre for diesel. The Finance Minister acknowledged that this was below the amount required by the beleaguered Road Accident Fund. This may be amplified by world oil prices and the Rand/Dollar exchange rate.
- Sin Taxes: The taxes on sin tax items increased. If You are a person who enjoys any of the following products expect to face the following price increase.
- A beer will cost you 12c more and the total levy stands at R1.74
- Wine increased by 22c per bottle and the total levy stands at R3.15
- Sparkling wine increased by 84c per bottle and the total levy stands at R10.16
- Whiskey increased by R1.14 per bottle and the total levy stands at R65.84
- Cigarettes increased by 64c per pack and the total levy stands at R7.80
- Social Grants: Social grants were increased moderately to attempt to appease both the socialists who expect larger social grants and capitalists who believe that they need to be reined in. The following changes to the value of social grants were announced.
- The old age and disability pensions increased by R80 to R1770 per month
- The foster care grant increased by R40 to R1000 per month
- The child care grant will increase by R10 in April and R10 in October 2019 to reach R430 per month.
Increased taxes increase net revenue for the State whilst grants decrease the net revenue for the State. These taxes and grants have not been altered in any significant way which then begs the question of how will South Africa combat rising debt and financially distressed state owned entities (SOEs)? The Finance Minister‘s main solution to this problem is to implement a reduction to the size of the state’s wage bill of R27 billion over 3 years. But how will this be achieved? This would be done by offering older servants early retirement and placing limits on overtime, bonuses and pay progression in the future – will this be enough to arrest the growing GDP deficit and ailing SOEs? Probably not and therefore Minister Mboweni gave an indication into the potential philosophy for raising tax revenues in future when he spoke about his belief in the “user must pay” principle. Undoubtedly, Mboweni was referring to the existing E-Toll and Eskom sagas. These statements provide sufficient evidence to suspect that when the new electricity tariff is announced, NERSA will grant Eskom a larger increase than in recent years. Similarly, this suggests that the E-Toll system will not be scrapped in the short term. Both of these possible outcomes are negative to You, the user.
Finally the overall themes that characterised this year’s budget speech are as follows:
- Tax changes on individuals are to be kept as neutral as possible.
- The Finance Minister is an advocate of the “user must pay” principle which could see tariffs charged on individuals, such as electricity and E-Tolls being increased as a means of moving the financial burden more onto the user than the state.
- Indebted state owned entities will not be bailed out and will need to repay any loans they receive from government and comply with government’s requirements for lending them money.
- For the time being government believes that we are on track to peak at a 60% debt to GDP ratio.
In summary, it was a fairly uneventful budget speech – in line with most expectations that it would be lacking surprises as this is an election year. Whether or not foregoing making meaningful changes to the revenue raising model this year will impact our debt to GDP in the future remains to be seen, but for now, the tax burden on individuals has remained relatively unchanged. It is the future we should worry about.