South African National Budget for 2021 – Where To From Here?

Comments and Cautions for Business and Private Wealth Individuals

Finance Minister, Tito Mboweni, delivered a well-received South African National Budget for 2021 Speech on Wednesday the 24th of February. Millions breathed a sigh of relief as a R100bn revenue overrun translated into corporate income tax (CIT) savings, and conversations around new wealth tax were low-key.

While these points are good news, businesses and private wealth individuals should consider how local and international reactions will impact the economy—and have the proverbial final say.

A Board View of the 2021 National Budget

The overall tone of the budget speech is positive, primarily focused on reducing deficits and interest payments, stimulating investments and ultimately keeping money in the country.

• The budget deficit is estimated at 14% for 2020/21: The consolidated budget shows revenue of R1 362 billion versus an expenditure of R2 052 billion.
• Real GDP is predicted to grow at 3.3% in 2021, yet only 2.2% in 2022.
• Foreign remuneration earned by South African tax residents remains exempt.
• Corporate income tax was lowered.
• The minimum threshold for personal taxes was raised, which is expected to provide R2.2-billion in tax relief.
• SA will require R361bn less in loans over the next three years.
• Gross debt has ballooned from 65.6% to 80.3% of GDP for the year 2020/21.
• SA’s public finances remain dangerously overstretched. The fastest-growing item of state spending is SA’s debt servicing costs, estimated at R916bn over the medium term to 2023/2024. 
• Previously announced increases amounting to R40 billion over the next three years would be withdrawn.

Considering the bobbing and weaving that 2020 demanded, Mr Mboweni has done an exemplary job. However, many variables could still impact businesses and private wealth individuals, which are the most exposed markets at this time.

A Financial House Of Cards

The national budget for 2021 hangs precariously on the success of three points. Without this, it is almost sure that severe corporate and individual tax hikes would have to make up for shortfalls.

1. The Public Sector Wage Freeze

The national budget plan relies mainly on a public sector wage freeze, which would result in savings of R144bn. It protects SA from taking further loans (where we are already overextended). With unions already contesting the move, the country’s hopes of financial reform are on tenterhooks.

2. The Pandemic Playing Along

Mr Mboweni has made provision for a possible 3rd wave, but any further devastation would warrant going back to the drawing board.

3. SARS Hitting Its Collection Target

The relative tax relief laid out in the budget was possible in part because SARS had higher revenue collections this fiscal year. Indeed, Mboweni said that “SARS will establish a dedicated unit to improve compliance of individuals with wealth and complex financial arrangements.”

How do Market Reactions to the Budget Speech Affect Me and My Business?

Although gross government debt is now set to peak at 89% of GDP in 2025/2026 (down from an estimated 95%), rating’s agency Moody’s still expects the debt to GDP ratio to hit 100-per cent in future.

As such, Moody’s has downgraded South Africa to sub-investment grade. Downgrades—which weaken the country’s credit reputation—invariably shake investors’ confidence. Private investment is a cash in-flow for the country. Not only does less money enter the country, but we also see foreign investors actively withdraw their forex.

The downgrade means that all lending becomes inherently more high risk. With that comes higher interest rates for individuals, business and the government. It is most likely that the government will rely more on taxpayers to fund debt in the immediate term.

Does This Mean We Should Expect Taxes To Increase?

We can’t say for sure, but we can point out that several tax legislation proposals in play could affect the taxes you currently pay. These include:

• Bolstering policies regarding anti-value shifting, anti-avoidance, de-grouping and intra-group transactions.
• A venture capital company tax incentive regime.
• Changes to retirement annuities such as applying a tax on withdrawals of retirement.
• Charging interest when an individual ceases to be a tax resident.

While there was no overt mention of wealth tax reform, there were subtle allusions to wealth tax plans being on the table.

It’s hard to prepare for a storm amid sunshine. Let Exceed monitor the economic barometer on your behalf.