SA BUDGET 2019 – A Review

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Author: Ferdie Schneider , BDO National Head of Tax and Tax Partner.

The Minister of Finance, Mr Tito Mboweni, delivered his National Budget Speech today. An eloquent touch by the Minister was his placing and contextualising of the Faith of the Country, South Africans, and the Economy, on Scripture and opened with a quote form Zechariah 8 verse 12:

For the seed shall be prosperous; the vine shall give her fruit; and the ground shall give her increase, and the heavens shall give their due; and I will cause the remnant of this people to possess all these things.

This must have been one of the most difficult Budgets to deliver in recent South African history (by an experienced Finance Minister or not!). Why would that be? A few dilemmas that we as South Africans are facing include an inordinately high unemployment rate, an ever-growing Government Wage Bill, low to no growth in GDP, Mismanagement of State-Owned Enterprises (notably Eskom, SAA, SABC, SARS, Denel, and the like), the possibility of a further credit rating downgrading, high direct and indirect tax rates, and the list goes on

However, considering where South Africa finds itself, the Minister did well. The Minister outlined National priorities that will resonate with most South Africans. Personal Income Tax, Corporate Income Tax, and VAT rates were (but for one or two small tweaks) left as is. Good news for most South Africans. Except, of course, that South Africans still need to budget for the impact of inflation, which makes every Rand they earn worth only 96% (after adjusting for inflation rate of 4%). The Minister, very creatively, rapped the National Budget in paper of Growth and the Future, not the current. Minister Mboweni and his Team at Treasury may again (as seems to be the trend in the last number of years) have been overoptimistic when forecasting growth in GDP.

Minister Mboweni carved his budget from six cornerstones, namely:

  1. Increasing higher economic growth
  2. Increasing tax collections
  3. Moderating expenditures
  4. Stabilising and reducing debt
  5. Reconfiguring State-Owned Enterprises
  6. Managing the Public Sector Wage Bill

 

At the October 2018 Medium Term Budget Policy Statement (MTBPS), the Minister projected tax revenue of R1.3 trillion. Tax revenue has been revised down by R15.4 billion. Approximately of the shortfall increase from October 2018 are attributable to higher than expected VAT refunds to clear some of the backlog SARS had in this regard. This money is available in the economy and may have a slight accelerator effect.

The Minister reiterated the importance of the role the Nugent Commission played in highlighting some of the corrections needed at SARS, including:

  1. Appointing a new Commissioner for SARS (work in progress)
  2. Establishing a new Illicit Economy Unit (August 2018) to fight trade ion illicit cigarettes and tobacco
  3. Re-opening the Large Business Centre (LBC) (long overdue and welcomed!)
  4. Strengthening the SARS IT Team and System (reminds one of certain Nugent declarations!)
  5. Information-sharing agreements to curb cross-border tax evasion schemes

At the time of the MTBPS, spending was projected to be R1.5 trillion, which left a shortfall of R215 billion or 4.3% of GDP. Since the MTBPS in October 2018, baseline expenditure was revised downwards by R50 billion over the medium term. Half of these reductions result from adjusting government compensation spend and R12.8 billion from measures to reduce spending on specific programmes. Allocations have provisionally been made to support Eskom and the Infrastructure fund, which offsets

the baseline reductions. As a result, the expenditure ceiling is increased by R16 billion over the next three years. The Minister quotes Oliver Twist when he said Please Sir, may I have some more.

GDP growth was projected to be 0.7% at the 2018 MTBPS and has remained the same. Real GDP growth is expected to increase to 1.5% in 2019 and to strengthen to 2.1% in 2021. Both these estimates seem overly ambitious, especially the 1.5% which is double that attained in 2018 (0.7%), with no material good news (other than perhaps some activity by the President on attracting FDI).

The Minister very aptly contextualised the expectations for 2019/20. Revenues of R1.58 trillion are expected, whilst expenditure is budgeted to be R1.83 trillion. This leaves a shortfall of R243 billion! This means that South Africa is borrowing R1.2 billion every working day. Expenditure on interest alone will be R209.4 billion, or R1 billion per working day! The Minister is of the view that expenditure and tax adjustments are designed to counteract (largely) the addition R50 billion allocated to Eskom and the additional revenue shortfall. This all results (probably optimistically, even if just a tad!) in gross national debt stabilising at more or less 60% of GDP in 2023/24.

Government intends to reduce the Public Wage Bill (National and Provincial) by R27 billion over the next three years. This will be done by offering older employees early retirement (R20 billion saving over next three years). The shortfall will be complemented by limits on overtime, bonuses, and increases.

National non-interest spending is estimated at R5.87 trillion over the next three years. Governments spending (or investment) priorities include Learning and Culture (R1.2 trillion); Health Services (R717 billion); and Social Development (R900 billion). The President provided the following guiding objectives:

  1. Accelerate inclusive economic growth and create employment, including attracting FDI, relaxing VISA requirements, increasing eligibility for the Employment Tax Incentive Scheme (supporting 1.1 million people), decreasing data costs with assistance of ICASA, allocating R20 billion to industrial business incentives, allocating additional R1.1 billion over next three years to the Jobs Fund, allocating half a billion Rand to the Small Enterprise Development Agnecy, and supporting emerging farmers with R1.8 billion.
  2. Improve the education system and develop skills required for the future, including allocating R30 billion for new schools and existing infrastructure, spending R111 billion to assist 2.,8 million poor deserving students to study at universities and TVET colleges.
  3. Improve living conditions for all especially the poor, including allocating R567 billion to social grants and increases, a R2.8 billion new human resources grant, R1 billion for medical interns, R1 billion to increase wages of community health care workers to R3500 pm, reprioritising R14.7 billion to two new conditional grants for informal settlements upgrading to give them access to basic amenities, increasing SANRALs allocation by R3.5 million over the next three years to improve non-toll roads.
  4. Fight corruption and crime, including establishing a new Investigating Directorate in the NPA.
  5. Strengthen the capacity and ability of Government to address the peoples needs, including the existing Financial Management grant, and the Municipal Systems Improvement grant, and strengthening the Auditor Generals role in Municipalities through the Public Audit Excess Fee Bill tabled on Budget Day.

The Minister concluded with reference to South Africas Macro Challenges and Governments answers to them, namely:

  1. Sustainability Challenge, including climate change, expanding renewable energy, and the introduction of the carbon tax, effective 1 June 2019.
  2. Rapid Urbanisation Challenge, including building up and not only horizontally.
  3. Nationalism Challenge, including attracting high skill foreigners.

All in all, the Minister had a difficult task. He delivered his Budget Address 2019 with his hands tied behind his back, but still managed to slip his one hand out slightly to point towards the potential of a new South Africa that needs to redirect, focus on growth, fixing our State-Owned Fiascos, increasing SARS efficiency, attracting skilled foreigners, and educating our youth adequately. Not bad!