Tag: hikes

2021 Budget in a nutshell

Source: SA Commercial Prop News

Finance Minister Tito Mboweni on Wednesday delivered the toughest budget since the dawn of democracy. His speech comes in the wake of shocking unemployment figures that were shared by Stats SA on Tuesday.

The unemployment rate in the fourth quarter of 2020 increased by 1.7 percentage points to 32.5% compared to the third quarter. This is the highest since the start of the Quarterly Labour Force Survey (QLFS) in 2008.

Taxpayers can breathe a sigh of some relief as Finance Minister Tito Mboweni tabled a 2021 Budget Speech free from substantial tax hikes and that will bankroll South Africa’s Covid-19 vaccination programme.

The Budget Review said total consolidated spending is expected to amount to R6.16 trillion over the next three years or R2 trillion each year over the medium term, with the majority of the spending going towards social services.

Covid-19 vaccine funding

Government has set aside R19.3 billion to fund Covid-19 vaccines, in the interests of saving lives and supporting the economic recovery. R10 billion will be used for the purchase and delivery of vaccines over the next two years.

No new taxes have been introduced to fund vaccines – funding will be provided through budget allocations, emergency withdrawals and – if needed – the contingency reserve.

Vaccines will be rolled out free of charge for the majority of South Africans, while private providers will be able to claim back from medical aid schemes.

Direct taxes

Government will not introduce hikes for personal income tax and corporate income taxpayers, in an effort to aid economic recovery and ease financial pressures on households and businesses.

The state had a revenue windfall in the latter part of 2020, brought about by increased corporate income tax receipts from mining companies coming off the back of improved commodity prices. Improvements in consumption and wages also bolstered revenue.

The tax revenue shortfall is now expected to stand at R213 billion, lower than the R312 billion projected during the Medium-term Budget Policy Statement tabled in October last year.

Government has also withdrawn a proposal to raise R40-billion in additional revenue over four years.

Hikes on indirect taxes

Government will levy an 8% increase on excise duties for alcohol and tobacco products in order to discourage their consumption and promote good public health.

Unemployment

Mboweni said despite government efforts to boost job creation and soften the blow for those who lost their jobs in the past year, the unemployment crisis in South Africa shows little sign of letting up.

Budget said R12.6 billion was allocated to various sectors to create about 694 000 short-term jobs in the 2020/21 financial year and that this programme is expected to continue in the 2021/22 financial year.

The Budget Review said the outlook remained uncertain and the economic effects of the pandemic would continue to be far-reaching. It paid R11 billion to the public employment initiative in 2021/22. By January 2021, the initiative had created 430 000 temporary jobs and aims to create another 180 000 by March.

Wages

Mboweni said savings in public service wages could be achieved through doing away with annual cost-of-living adjustment in the public service until 2023-24, reduced head counts, early retirement, natural attrition and the freezing or abolishing of non-critical posts.

At least two unions legally challenged the failure to honour the previous wage agreement and it is currently before the Constitutional Court, after the Labour Appeals Court dismissed an application for government to be compelled to honour that agreement.

“A three-year inflation-linked agreement would raise the total shortfall to R112.9 billion by 2023/24. And an agreement similar to the one achieved in 2018 – one percentage point higher than inflation – would create a compensation shortfall of R132.7 billion (or 2.2% of GDP) by 2023/24,” the review said.

According to the Budget Review spending programmes circular, the fastest-growing functions over the medium-term are economic development, community development and general public services, with spending on health amounting to R248.8 billion in the 2021-22 financial year.

The debt ditch beckons

The Budget Review said debt-service costs were higher than the 2020 Budget estimates by R3.6 billion in the 2020/21 financial year, R11.3 billion in the 2021/22 financial year and R17.9 billion in the 2022/23 financial year.

It expects debt-service costs to continue their increase at an annual average rate of 13.3%, reaching R338.6 billion in the 2023/24 financial year.

“Due to the higher budget deficit, coupled with fluctuations in interest, inflation and exchange rates, debt-service costs will continue to rise over the medium term,” the Budget Review said.

The Budget Review said gross national debt was projected to grow continuously over the long term, despite 2020 budget proposals to reduce expenditure growth. The review said strategies to contain debt would be monitored regularly by the minister.

Some SOEs face debt defaults

National Treasury highlighted that state-owned enterprises (SOEs) suffered a deterioration in their financial performance, partly owing to the impact of the Covid-19 pandemic and the associated lockdowns.

Many SOEs risk defaults, Treasury warned. Just last year, the Land Bank defaulted on its debt. Last year, the bank was allocated R3 billion in the 2020 special adjustments budget. The October Medium-term Budget Policy Statement also highlighted it would require R7 billion to support the restructuring of the entity.

Infrastructure

Mboweni says that the state has budgeted R791.2 billion for its infrastructure investment drive, without making a time table clear. “All these efforts to expand infrastructure will be wasted if the end user does not pay a cost-reflective tariff for usage,” he says.

Economy

Mboweni says SA’s economy is expected to rebound by 3.3% this year, following a 7.2% contraction in 2020. The finance minister says there is reason to hope from SA’s “much-improved economic outlook”. The global economy will be buoyed by the expected rollout of Covid-19 vaccines, he notes.

Big tax hikes loom

Source: MyBroadband

Finance Minister Tito Mboweni will deliver the 2020 National Budget on 26 February, and both Absa and Efficient Group chief economist Dawie Roodt predict significant tax increases this year.

Speaking to ENCA, Roodt said the state’s debt has reached such high levels that it is now in deep financial trouble.

He said the rate at which the government is borrowing money is increasing much faster than the rate at which the economy is growing.

According to Roodt, South Africa has reached a point where it is extremely difficult to turn the situation around.

To improve the country’s financial situation, the government will either have to cut spending or increase taxes.

With the government’s unwillingness to cut the public sector payroll or state spending, the only other option is to increase taxes.

Roodt said this means that tax hikes are not a possibility, but a certainty. The only question is which taxes will be increased.

Predicted tax increases

While Absa and Roodt agree that South Africans should brace themselves for tax increases this year, they differ on which taxes will be increased.

Roodt said he is sure things like the fuel levy and sin taxes – a tax on items such as alcohol and tobacco – will be increased, but this is a small part of total tax revenue.

He explained that there are only two main taxes which will make a real difference – personal income tax and value-added tax (VAT).

Roodt predicted that, in addition to various indirect taxes, there will be an increase in personal income tax rather than VAT.

Absa, in comparison, predicted that the government will increase the VAT rate by one percentage point to 16%.

The bank agreed with Roodt that the government is likely to lift indirect taxes in an effort to earn more revenue.

This year’s budget will be harsh

Economist Mike Schussler said the government is currently spending R25 billion more than its tax revenue every month.

The situation deteriorated rapidly over the past two years, declining from a R15-billion deficit to a R25-billion deficit.

“This year’s budget is going to be harsh,” said Schussler. “Other years were tough, but this year will be ‘eina’.”

Review of fuel levy ‘is possible’

By Bekezela Phakathi for Business Day

The possibility of reviewing the fuel levies downwards to ease the financial burden on motorists and consumers has not been ruled out, says President Cyril Ramaphosa.

“The fuel levy is part of fiscal architecture we have in our country … we have said we want to look at that … the fuel levy is precisely one of those we are looking at,” Ramaphosa said in parliament on Wednesday

“We are sensitive to the burden imposed on our people.”

The price of fuel recently went up to more than R16 a litre in inland provinces. The hikes are expected to have a ripple effect on the economy.

The price of a litre of petrol in SA has more than doubled in 10 years, while the levies increased from about R1.30 in 2008 to the current R5.30.

The fuel levy contributes close to R63bn annually to the fiscus. The Road Accident Fund levy accounts for R1.93 of the fuel price. Taxis and other public transport operators have already upped their fares in response to the increases.

Ramaphosa said any decision would have to weigh the advantages of reducing the fuel levy against the loss of revenue for the state, which will have an effect “on a whole lot of things”.

“It’s not as easy as snapping a finger and coming up with an answer … it’s one of those issues we continue to look at and seek solutions for.… We import a commodity we have no control of in terms of prices,” said Ramaphosa, during a question-and-answer session.

DA leader Mmusi Maimane had asked Ramaphosa whether there was a plan to reduce the fuel levy, which he called a “corruption tax”. “The RAF [Road Accident Fund] is declaring losses and money is being wasted. Is there a plan to reduce the fuel levy?” he asked.

Department of energy officials told parliament on Tuesday that any adjustment to the fuel levy could only take place in the next financial year.

The government has said before there is nothing much it can do to stem the fuel increases since the country imports the bulk of its requirements. The change in the price of petrol is typically a function of both changes in international exchange rates, particularly the US dollar-rand exchange rate, and the change in international crude oil prices.

Ramaphosa also answered questions on the unemployment crisis and the burning issue of land expropriation without compensation.

“Since 2009 I have heard about plans and summits, yet millions of South Africans are still unemployed,” said Maimane. “The definition of insanity is doing the same thing and expecting a different outcome or keeping the same people [in the cabinet] and expecting a different outcome.… Can we bring change so we can expect a different economic trajectory?”

Ramaphosa said the cabinet would soon announce details to stimulate economic growth, including finalising the Mining Charter and allocation of broadband spectrum.

“We want to unlock the levers that hold the economy back,” said Ramaphosa.

The president hit back at Maimane, saying: “I’ve not heard anything wise that you’ve said.… You are playing the people or the man, not the substantive issues that have to do with economic growth.”

Without land redistribution there would be no stability in the country, Ramaphosa said.

“Transformation means we must have redistribution of land because there was an injustice committed many years ago.… If you do not want stability then do not transform … but if you want stability then you must transform.… We will make sure that our country succeeds. Even the landowners must embrace this process,” he said.

1 April: 4 major taxes are coming

While analysts praised former finance minister Malusi Gigaba for a budget speech that steered clear of any shocks or nasty surprises, there are still a number of big changes that will hit South African pockets come April.

VAT hike

Arguably the biggest of these is the increase in the effective VAT rate, which will rise from 14% to 15% adding approximately R22.9 billion to the fiscus.

Bruce Fleming, a financial planner with Old Mutual Private Wealth Management said that the increase was a tough political decision – but said it was important to remember that it is the first such adjustment since 1993 and was therefore overdue.

However, Fleming warned that all households will feel the pinch of the increase, and while zero-rated food items will take some of the increased burden off the poor, there has been no further developments as to whether more items will be added to the basket or even if additional items will be introduced at all.

Fuel levy

Commuters are expected to feel additional pain from 4 April with an increase in the fuel levy – although this increase could be slightly offset by a stronger rand and lower oil prices.

From this date the fuel levy will be increased by 52c per litre on 4 April, pushing up the general fuel levy to R3.62 per litre of petrol, after a hike of 30c per litre last year.

“This is quite significant as it will place an extra burden on all road users especially on those who mostly rely on public transport and will ultimately have an effect on inflation,” said Fleming.

Sin taxes

As expected there was another increase in sin taxes and South Africans will pay between 6% and 10% more for alcohol, while smokers will be paying 8.5% more to sustain their habit.

Fleming said that this is expected to bring in an additional R1.33 billion in revenue in the 2018/19 financial year.

However, the increase in South Africa’s sin taxes are also particularly notable this year, given the recent push towards further legislating both alcohol and smoking regulations.

This means that we could see both a ban on public smoking and an increased drinking age (from 18 to 21) by the next budget speech.

‘Not Wealth’ taxes

“Income tax for the higher earners will continue to squeeze them as there is no relief for inflation in the top four tax brackets,” said Fleming.

“While the bottom three personal income tax brackets as well as the primary, secondary and tertiary rebates will be partially adjusted for inflation through a 3.1% increase, the top four brackets will remain unchanged.”

Despite not seeing a direct increase in the higher wealth brackets, the budget was notable in the amount of ways it plans to indirectly tax wealthier South Africans.

This includes an increase in estate duty from 20% to 25% for estates worth R30 million or more, an explicit tax on smartphones, and an increase in the tax on vehicle prices.

Source: Supermarket & Retailer

Finance Minister Malusi Gigaba said on Tuesday that power utility Eskom’s application for a 19.9% electricity tariff hike next year is “unjustified”.

Gigaba was addressing a business breakfast in Umhlanga, north of Durban, organised by the Durban Chamber of Commerce and Industry.

“To ask South Africans to pay more … when the economy is subdued and the mid-term outlook is as subdued as it is and we have the types of financial and leadership challenges that Eskom is now experiencing, I think that will serve as a perverse incentive,” he said. “We’ve got to be careful what we do.”

Eskom has asked National Energy Regulator (Nersa) to allow it to implement a 19.9% tariff hike for the 2018/19 year. Nersa is currently conducting public hearings into the feasibility of the increase.

Gigaba also called on the power utility to stabilise its finances, saying that public officials needed to be “circumspect” about how they manage public resources.

“All public officials needed to be conscious of the need to fight corruption, irregularities and inefficiencies to ensure that state-owned companies perform well,” said Gigaba.

“That’s why I think that the Eskom application for a higher tariff is unjustified, given the fact that on the other hand we have excess electricity.”

The finance minister told the business breakfast that Eskom must “incentivise” South Africans by improving its governance and employing what he termed “properly qualified executive leaders from CFOs (chief financial officers) to CEOs (chief executive officers) and all other executive directors”.

Mini budget

Gigaba criticised those who said his mid-term budget painted a bleak picture of SA’s economy and failed to boost confidence.

He delivered his maiden mini budget to Parliament in Cape Town last Wednesday.

The minister told the business breakfast that he had to present facts about the state of SA’s economy as they stand. “We gave an honest view of the challenges facing our country. We couldn’t go and spin ourselves to the country knowing all is not well. We couldn’t just go to Parliament and stand before the nation and lie.

“All the things that we said in terms of the country’s economic outlook for the medium-term budget were facts, as they stood before us, when we presented the statement,” he said.

“No minister of finance, worth their soul, would have presented anything different; they would have stated the facts as they are.”

Pay your taxes

Gigaba said everyone needs to pay their taxes, given that SA faces a R50.8-billion tax revenue shortfall.

And with National Treasury expecting GDP growth of only 0.7% this year, Gigaba said that “little social and economic transformation” could be expected without stronger economic growth.

He urged the private sector to join hands with government to boost the economy.

“Economic growth and transformation must become neutrally reinforcing principles. Government is doing its share and will continue doing so,” he said, mirroring what he said in his budget address.

“The private sector must bring something to the table, it must be a give and give situation,” he said.

Speaking of the state’s mounting debt, the finance minister said government doesn’t want to leave future SA generations facing a debt hole they won’t be able to manage.

“We need to give them a growing economy with less debt so that they could begin developing wealth for themselves and grow [the] economy of those who will come after them,” he said.

By Mxolisi Mngadi for Fin24

In a highly debated article, Investec’s Brian Kantor went knocking on the South African Reserve Bank’s door, pleading with them to focus on the things they have control over. His main concern is that of stagflation.

And while high inflation is usually cornered by higher interest rates, that’s the case when it’s demand driven. And he argues in South Africa’s case, it’s due to factors beyond the Reserve Bank’s control.

The Bank wasn’t listening and raised rates, using high inflation as the reason.

In economic theory there are two types of inflation:

Cost Push Inflation: This is price increases caused by increased costs of production (increased labour costs, increased costs of raw materials (think higher oil prices due to unrest in middle east, or increased prices for agriculture products due to droughts that are limiting supplies).

Demand Pull Inflation: Demand pull inflation is experienced when there is an increase in demand for goods and services, or when the demand for goods and services outstrips supply of goods and services. Strong growing economies will have increased demand for goods and services as more people are employed. Leading to increased inflation.

SARB’s main tool to control inflation is interest rates. The problem with interest rates is that it is a very crude tool to control inflation. The theory goes that if inflation goes up, it implies that there is too much money available to spend in the economy, and retailers and wholesalers know this, and they start pushing up prices to earn higher margins on their products, causing inflation to rise (Demand Pull inflation).

While this might be true for a fast growing economy. This is hardly ever the case for an economy with sluggish growth, as South Africa is currently experiencing. Interest rates are not as effective in controlling inflation when it is caused by Cost Push factors.

Now that South Africa’s inflation rate has breached the 3% to 6% target of SARB, they need to act (and they have been acting over the last couple of months by increasing interest rates). Problem with increasing interest rates to control inflation, when inflation is caused by external factors and shocks (Cost Push inflation), and not by increased demand (Demand Pull inflation).

Overall demand in the economy will slow down as interest rates lowers the amount of money people have to spend on buying goods and services as more of their money goes towards paying their debt,

Yet there is nothing to suggest that inflation would slow down too as it is not caused by increased demand. In essence we can end up with continued high inflation and lower economic growth (since higher interest rates is slowing down spending in the economy). High inflation and low to no growth…That’s called Stagflation. And this is the situation South Africa is in.

SARB is walking a very tight rope and needs to be careful when deciding on interest rates, as they can end up doing more harm than good by blindly increasing interest rates as inflation goes up. We suspect that the last couple of interest rate increases has been more to protect the vulnerable Rand than controlling inflation.

Higher interest rates leads to more foreign currency flowing into SA to take advantage of higher interest rates, leading to increased demand for the Rand, and it strengthening. A stronger Rand will also ensure that we import less inflation. Import inflation occurs when prices of goods being imported becomes more expensive as the Rand weakens, leading to those goods costing more in Rand terms.

SARB will never admit or acknowledge that they might be increasing interest rates to protect the Rand, as that is not their mandate, but we suspect they are more worried about that Rand than they are about inflation at this point in time, as they know current inflation trends is not due to increased demand in the economy, but due to external factors outside their, or consumers control.

By John Maynard* for www.fin24.com
* This is a nom de plume

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