Low economic growth, vast unemployment, increasing debt levels, coupled with South Africa still being in a state of disaster two years since the start of the Covid-19 pandemic, all contributed to a complicated juggling act for the Minister of Finance.
Given the unrest witnessed in 2021 along with weak foreign investment, the 2022 budget had to be geared not only to curb unemployment and to stimulate economic growth, but to also give assurance to foreign investors.
In the words of Minister Godongwana “we need to strike a critical balance between saving lives and livelihoods, while supporting inclusive growth. This budget presents this balance”.
Some key aspects to consider that has affected spending potential and therefore, economic growth:
- An already high unemployment rate that was exasperated by Covid-19.
- A lot of companies had to implement retrenchments and/or salary cuts, leading to lower household income and therefore lower spending.
- Lower income levels also directly impact the amount of personal income tax and VAT that is gathered.
- Inflation has increased to 5.7% – placing increased pressure on low-income bracket tax earners.
- The emigration of highly skilled workers has increased.
- Higher commodity prices, which supported the economic recovery, slowed in the second half of 2021.
- Industrial action in the manufacturing sector, and the re-emergence of loadshedding, also slowed the pace of the recovery.
- Continued requests for financial support from financially distressed state-owned companies.
According to Minister Godongwana, “only through sustained economic growth can South Africa create enough jobs to reduce poverty and inequality; enabling us to reach our goal of a better life for all.”
Revenue, deficits, and debt to GDP according to the 2022 budget:
- Tax revenue for 2021/22 is estimated to be R1.55 trillion, exceeding the original budget estimate by about R182 billion.
- Higher income levels have been primarily driven by the resources sector due to increases in commodity prices.
- The budget saw higher revenue from other sectors and other tax instruments, such as personal income tax, value-added tax followed by corporate income tax.
- Government debt has reached R4.3 trillion and is projected to rise to R5.4 trillion over the medium-term.
- The consolidated budget deficit is projected to narrow from 5.7% of GDP in 2021/22, to 4.2% of GDP by 2024/25.
- The debt ratio will stabilise at 75.1% of GDP by 2024/25 (which is 3% lower than projected in the MTBPS).
Below is a quick overview of some of the key updates announced in the budget speech:
Tax credits and rebates:
Levies, duties, and charges:
Other areas of tax collection that were introduced and/or increased for the first time in a while:
Disclosure of wealth will be required to assist with the detection of fraud
To assist with the detection of non-compliance or fraud through the existence of unexplained wealth, it is proposed that all provisional taxpayers with assets above R50 million be required to declare specified assets and liabilities at market values in their 2023 tax returns.1
Retirement fund taxation and reform on the cards
Changes have been proposed to allow for greater investments into infrastructure funds by Regulation 28 compliant funds. Amendments to Regulation 28 are expected to be gazetted in March 2022.
There are proposals to allow members access to one-third of their retirement fund savings while the two-thirds balance must be preserved for retirement. The tax consequences of these changes are still being considered. The draft legislation on these amendments will be published for comment in the middle of the year.
In conclusion
Given the endless stream of hardships that South Africans have had to face since the outbreak of Covid-19 and its devastating aftermath, the 2022 budget was expected to be consumer-orientated, and it has delivered on expectation. Given the fragile state of the economy and the country’s growing debt burden, National Treasury faced a difficult balancing act between providing the necessary relief to consumers and businesses while also taking steps to improve the country’s fiscal metrics.
Minister Godongwana shared this view and stated, “…in these trying times and without compromising our ability to collect revenue, we have managed, through these tax proposals, to keep money in the pockets of South Africans, and to create conditions for greater investment in the economy”.
According to Treasury, if the personal income tax brackets were not adjusted, revenue would have increased by R13.5 billion. This relief is mainly targeted at individuals in the middle-income group.
The government’s main task will remain to create jobs, to ensure that we continue to grow and stimulate the South African economy and to keep government spending low.
Perhaps the most crucial element of the budget was the continued commitment to the fiscal stabilisation programme, with the restriction on increases in public sector wages being a vital component. As we have seen from previous budgets, implementation risk is high, given the politically unpopular move of restricting wage increases. This restriction is likely to continue to be contested by labour unions. Fiscal prudence going forward will be essential if South Africa is to avoid a debt trap in the medium term.
Useful links and resources:
1 Source: http://www.treasury.gov.za/documents/national%20budget/2022/review/Chapter%204.pdf
Michael Kruger
Investment Analyst
Morningstar Investment Management
South Africa
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