On 20 February 2019 Finance Minister and former Reserve Bank Governor Tito Mboweni opened his 2019 budget speech in the tradition of former Finance Minister Trevor Manuel, comparing the South African economy with a seedling plant, which is weak and needs a lot of care to grow and become as strong as needed.
This was already an indication of what was to come, every step of the way into the Budget Speech showed where he “learned the ropes” of handling a difficult budget. And a difficult one it was as he had to work with nothing but still tried to ooze confidence.
h2. GENERAL ECONOMY
The minister painted a bleak picture as the country struggles with rising expenditure, failing SOEs (please see the following article in this eBRIEF) and declining revenues, but outlined several processes underway to try and rein things in.
Economically, real GDP growth for South Africa in 2019 is forecast at 1.5%, and is expected to reach 2.1% by 2021. In the medium term, spending reductions are expected at ZAR 50.3bn, while provisional allocations of ZAR 75.3bn have been budgeted, mainly to deal with the Eskom crisis.
The country’s budget deficit has widened because of Eskom, a revenue shortfall of ZAR 15.5bn and higher than expected VAT refunds, and is now seen at 4.5% of GDP in 2019/2020 – up from the 4.2% forecast in the mid-term budget delivered in October 2018.
Expenditure in 2019 is expected at ZAR 1.83tr, with the bulk (ZAR 1.1tr) going to social services. State wages and compensation remains the largest category of spending, accounting for 34.4% of consolidated expenditure – a level which the finance minister described as “unsustainable”. Measures are in place to realise a ZAR 27bn reduction in spending here, e.g. by reducing embassy staff and encouraging early retirement of public servants.
h2. TAX CHANGES
Minister Mboweni announced no changes will be made to income tax brackets for the year – but the tax-free threshold will be increased at a level below inflation. By not adjusting the income tax brackets for inflation, government will raise ZAR 12.8bn, he said.
Other significant tax changes include:
• Fuel levies will increase by 29 cents per litre for petrol and 30 cents for diesel. These below-inflation increases in fuel taxes together with the carbon tax on fuel will raise ZAR 1.3bn.
o General fuel levy increases by 15 cents per litre on 3 April 2019.
o The road accident fund levy increases by 5 cents per litre on 3 April 2019.
o A carbon fuel levy at 9 cents per litre on petrol and 10 cents per litre on diesel will be introduced with effect from 5 June 2019.
• Increases in alcohol and tobacco excise duties will raise revenue of ZAR 1bn – through a 7.4% and 9% increase.
• The sugar tax (under the promotion of health levy) will increase to account for inflation, moving from 2.1 cents per gram in excess of 4 grams of sugar per 100ml, to 2.21 cents from 1 April 2019.
• There will be no increase in the medical aid tax credit. This is to help fund the rollout of national health insurance. The zero-increase will allow government to generate additional revenue of R1 billion in 2019/20.
• White bread flour, cake flour and sanitary pads will be zero-rated for VAT purposes from 1 April 2019.
h2. NEW TAXES
• Government will review the ad valorem excise duty on motor vehicles in South Africa to remove an anomaly where vehicles produced locally are taxed at a higher rate than imported vehicles.
• There are plans to introduce a gambling tax to fund rehabilitation and awareness-raising programmes. This will be drafted in 2019.
• In a rather insane move government intends to start taxing e-cigarettes and ‘tobacco heating products’.
• Government will review the scope and definition of fuel levy goods in the Customs and Excise Act (1964) to include biofuels in the payment of RAF and fuel levies.
h2. ESKOM & other SOEs
The probably biggest concern to be addressed was the looming bankruptcy of ESKOM. According to Mboweni government will not take on the power utility’s debt, as has been conveniently suggested by ESKOM in the past: “I want to make it clear: the national government is not taking on Eskom’s debt. Eskom took on the debt. It must ultimately repay it,” he said, adding that those responsible for this debt might also become personally liable, a refreshing new take on accountability of corrupt and greedy officials like Brian Molefe and his predecessors.
However, he said that the restructuring plan – to split Eskom into three entities – is on track, and that Treasury is setting aside ZAR 23bn a year for the next three years to financially support Eskom during its reconfiguration, a proposal that one should decline. The split into three entities will not save money, but rather bear the risk of tripling admin overheads, unless the plan is to at least sell one of the three parts being Generation, Distribution and Transmission!
The 2018 MTBPS allocated ZAR 5bn to South African Airways (SAA), ZAR 1.2bn to South African Express Airways and ZAR 2.9bn to the South African Post Office (SAPO) in the current year, which was already bordering onto insanity as South Africa has to learn how to swallow its pride and follow a variety of European countries in their footsteps, who relinquished their national carrier post 9/11. But no, we hold on to depreciating assets, mismanagement and fuel a corrupt SOE leadership, which will continue to embezzle funds and waste state revenue on the useless presence of a national carrier and a post office that nobody uses anymore. It is 2019, Mr. Mboweni! At least you have denied Denel and the SABC their bailout wishes. Thank you!
h2. LAND REFORM
While government pushes ahead with its plans to make land expropriation without compensation more clear in the Constitution, Treasury is also allocating funds to accelerate land reform and acquire state land. ZAR 18.4bn has been allocated to accelerate land reform over the medium term, which will help finalise more than 1 700 restitution claims and acquire more than 325 000 ha of land for landless South Africans. Another move that has one only shake the head in denial and exasperation.
The previous “land restitutions” have shown that more than 60% of the formerly productive land which has been given to “landless South Africans” is now dormant, unproductive and vacated by those who took control, wasted the subsidies and left after the land was plundered. There is virtually not a single country in the world that supports the grotesque notion of entitlement more than South Africa. Does the government really think that every German, every Austrian, Spaniard or Frenchman, has land? And if not can go and demand land to be given to him or her?
As part of the President’s economic stimulus and recovery plan, government and organisations representing farmers of different commodities will implement 262 priority land-reform projects at a cost of ZAR 1.8bn …. a senseless expenditure!
Beside what was already states above, the Budget surely had positive elements. The funding of Small Enterprise development to the tune of ZAR 485.6bn is highly appreciated as only support of entrepreneurism and SME will ultimately guarantee growth and increased employment. ZAR 625m for the Development Bank of Southern Africa (DBSA) seems almost too little seeing and evaluating their role in furthering the agricultural sector, manufacturing and pushing for projects that enable increased exports.
The Infrastructure Development Fund will receive ZAR 526m, worth a small applause, but introducing the dreaded Carbon Tax on 1 June just gets a “Boooo” from us!
On a final note, not increasing the salaries of employees of the SOEs seems right in view of finances, but hits those who are not responsible. How about cutting down management’s wages to minimum wage level and have them pay back what they “earned” the last 10 years?
And using higher than expected VAT Returns as one excuse for reduced revenue is simple false. The treasury fails to understand that VAT is only be earned for the value actually added in the chain of trade and manufacturing, it is not earned where VAT has been paid to SARS and is now withheld although the VAT returns clearly justify the refund of overpaid VAT as a result from the difference between input and output VAT charged. SARS is currently driving almost 100 000 companies into liquidation as VAT due to SMEs is withheld without reason except for “cash flow constraints”. The new Commissioner is well advised to tackle this sad state of affairs at SARS before class actions will claim billions in damages suffered by the private sector.
Let us see Minister, how the Budget will pan out, you left us with little hope, but hope at last!