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The budget speech that Finance Minister Tito Mboweni is to deliver on 24 February will take place against the backdrop of a fragile economy that contracted between 7% and 10% in 2020 (estimates vary) and deprived the South African Revenue Service (SARS) of about R300-billion in revenue.
In this annual address to parliament, the finance minister outlines spending priorities for the financial year ahead, which will begin on 1 April. Forecasts will be provided for the size of the budget deficit, which is the difference between what the government plans to spend and what it expects to raise, with the gap closed by borrowing in the debt markets.
Which budget cuts should you listen for?
The amount of money the state can accrue from taxpayers will rely on the economy's performance, so the key ratios to watch are the size of the budget deficit relative to gross domestic product (GDP) and the size of the overall debt burden compared to GDP. If the economy does not grow at the forecast rate, the deficit and overall debt ratios will grow. And they are already looking unsustainable, which is why economists want to see a commitment to fiscal consolidation, which means making cuts to spending, notably to the public sector wage bill.
The picture painted in October in the Medium-Term Budget Policy Statement (MTBPS) was deeply concerning. Debt was at an eye-watering R4-trillion, while the budget deficit was 15.7% of GDP and the total debt burden was almost 82% of GDP and was expected to rise to around 95% by 2025. South Africa's sovereign debt ratings have all been downgraded to junk status, which means creditors expect a higher risk premium for lending their capital to the government. This means more money has to be spent on servicing the debt, leaving less for clinics, roads, education and other services the state is expected to provide.
Are tax hikes coming?
Understandably, the country’s debt has triggered some media speculation about tax adjustments, specifically as it affects households. But Standard Bank senior economist Elna Moolman does not expect anything significant on this front. "The direct impact on households are indeed via taxes – this time around, we don’t foresee any tax increases (beyond the potential inflation-related increase in specific taxes such as the fuel levy)," she said.
"The reasons are two-fold. Firstly, Treasury is concerned about the negative impact on the fragile and weak economy that tax hikes may have – even in the Feb-2020 budget prior to any local lockdown, government was too cautious to hike taxes. Secondly, we expect tax revenues to do much better than Treasury’s MTBPS forecast, which negates the need for tax hikes given the weakness of the economy."
South Africa's top income tax rate at 45% is already quite high and, as Moolman points out, collection may be better than SARS anticipated. There are a number of factors behind this state of affairs. Higher export prices for key commodities such as gold and platinum group metals meant the mining industry paid slightly more in taxes and royalties last year.
And the higher bracket that pays the most income tax was not as affected by lockdowns and lay-offs as the wider workforce. Plenty of white-collar employees joined the work-from-home brigade. Higher-than-expected revenue collection will also mean less borrowing required to plug the budget deficit.
"However, households should also focus on any relief to the lower income groups, which have been hardest hit by the crisis, and indications that government is sincere in its efforts to drive fiscal consolidation and ensure fiscal sustainability. We expect some additional relief for low-income groups, beyond the extension of the COVID-19 Social Relief of Distress grant, such an extension of the Presidential Employment Stimulus Programme," Moolman said.
What will the budget mean for the rand?
Markets can be expected to react to the minister's speech, including the very liquid forex market. This goes beyond the cost of, say, a family vacation abroad. The rand's exchange has implications for import costs and what consumers pay for items such as petrol at the pump, and inflation more widely. That in turn has an impact on interest rates – the South African Reserve Bank won't keep cutting if it is concerned about inflation.
The inflation rate affects the return we get on our investments and assets. If your annual return is 6% and inflation is 4%, you are only 2% wealthier at the end of the year. "The key for the rand will likely be whether government is still committed to fiscal consolidation,” says Moolman. “If the budget signals that there is still commitment to curb the wage bill growth and control spending, it should be rand-positive.”
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