Budget Speech 2021 – No Magic Way out of the Fiscal Abyss

On 24 February 2021 the Minister of Finance delivered his Budget Speech 2021 in front of mostly empty seats but with his usual, almost manuelesque humour, culminating in this remarkable statement:

… getting our fiscal house in order is the biggest contribution we can make to support our Economic Reconstruction and Recovery Plan … we remain adamant that fiscal prudence is the best way forward. We cannot allow our economy to have feet of clay!

He did not have a lot to work with and the status quo of the state finances is dismal to say the least, but somehow he piggy-bagged on President Ramaphosa’s strategy to bring “joy to the crowd” rather than focussing on the heavy rains that fall on state coffers these days. Here is the gist of his speech limited by relevance but commented in light of the current reality:

VERY BAD

“Treasury expects a budget deficit of 14% to GDP in 2020/21 due to the pressures of Covid-19” – added to the already gigantic debts future revenue will mostly service debts and not to be invested in urgently needed infrastructure: “Government’s borrowing will remain well above ZAR 500bn (!) per year in the medium term with gross loan debt to increase to ZAR 5.2 trillion (!) in 2023/24.

EXPECTED

“Treasury expects to collect only ZAR 1.21 trillion in taxes during 2020/21, which is about ZAR 213bn less than budgeted” – This is the largest tax shortfall in South African history and just underlines the question marks behind the forecasts for infrastructure investments and debt reduction.

The “annual increases in sin taxes, with the cost of a 750ml bottle of spirits increasing by ZAR 5.50, the price of a packet of 20 cigarettes increasing by ZAR 1.39 and fuel levies increasing by 27 cents and contributions to the Road Accident Fund by 11 cents a liter” were expected and have to be tolerated like usual.

POSITIVE SURPRISE

“A reduction in corporate tax from 28% to 27% for years of assessment commencing from 1 April 2022 with some limitations on corporate interest deductions and assessed losses carried forward” – definitively a positive surprise although the limitations may eat those advantages up. Let’s stay positive and await the details.

“Personal income tax brackets will be increased by 5%, which is above the published inflation rate, with the tax burden mostly reduced for lower- and middle-income households” – now here we expected a tax increase rather than this drop of income tax revenue by ZAR 2.2bn. Maybe he lacked the balls going for it as it would have resulted in a massive outcry for sure…

“Renovation and upgrade of all land borders in Public Private partnerships” – he could not stop from repeating the idea of PP as this is realistically the only chance for a successful implementation of upgrades.

OPTIMISTIC – NOT REALISTIC

“Real GDP is expected to grow by 3.3% in 2021 and then slowly fade to 2.2% in 2022 and 1.6% in 2023” and “Treasury estimates that it is on track to return to a budget surplus in 2024/25 after which debt is expected to stabilise at 88,9% by 2026 (80.3% in 2021)”

 – following the shrinking of the economy by 7.2% in 2020 and with the Disaster State still in place, no large-scale vaccinations happening and infection figures again soaring rather a wish than realistic forecast.

“More than R10 billion has been allocated to the purchase and delivery of Covid-19 vaccines over the next two years” – that budget is a joke as it does not cover a fraction of the vaccines needed and no order confirmation can be linked to this budget as there are no orders for vaccines, only dreams of receiving same.

“A ZAR 791.2bn infrastructure investment drive, in partnership with the private sector and “other players” is confirmed” – By whom? The budget does not allow for both, debt reduction and infrastructure spending, double reality setting in?

“Another ZAR 11bn has now been allocated to the Presidential Youth Employment Initiative bringing the funding for employment creation to close to ZA R100bn, specifically targeting the employment of young people.” – and we will see how those funds will be diverted, embezzled, misappropriated, ill-directed and nothing will come from that. There are neither viable stimulus plans nor safeguards in place, to the contrary: by abolishing s12J tax incentives for investing in local companies shows the lack of motivation to bring the employment back into an acceptable corridor.

AND MISSING

No mentioning of any budgets or plans to fight the corruption, not only in the PPE arena, which somehow counteracts and undermines President Ramaphosa’s drive in this regard.

Also no word about the dimension in which we have to expect ailing SOEs to be bailed out again.

And last – but most definitely not least – the Public Sector Wage Bill, the root of all fiscal evil these days, did not warrant any word or comment in his speech. Maybe he did not want to expose the incompetence of the Minister in charge, Senzo Mchunu, maybe he simply had no answers to this mountain of a problem.

FAMOUS LAST WORDS

The speech needs to be judged by the current climate into which it was born. No magic here, a few happy faces, a stronger Rand and a self-pleased Minister of Finance who was sent to the slaughterhouse but emerged unscathed and with his usual smirk on his face. Well done, just not useful at all!

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