Delivering the 2021 Budget Speech in the national assembly, the finance minister, Tito Mboweni, declared that national treasury has “crafted a Fiscal Framework that extends support to the economy and public health services in the short-term, while ensuring the sustainability of our public finances in the medium term”.
According to the Budget Review, all budgets are about balance – weighing the needs of the present and the future, assessing competing priorities for national development and managing revenue and expenditure.
2021 represents an exceptionally difficult balancing act.
“On one side is a raging pandemic that has led to the most severe global economic contraction in nearly a century. At the time of writing, COVID-19 has claimed the lives of 2.5 million people, including about 50 000 South Africans. On the other side is a weak economy, with massive unemployment, that is burdened by ailing state-owned companies, the highest budget deficit in our history and rapidly growing public debt.”
In response to the challenge, treasury highlighted that the 2021 Budget Review “looks straight ahead” and the 2021 Budget shows some progress “doing what we set out to do”.
The International Monetary Fund expects global economic growth to rebound to 5.5 per cent in 2021 and 4.2 per cent in 2022 boosted by additional policy stimulus and the expected rollout of COVID-19 vaccines.
Economic growth is expected to gain momentum during the second half of 2021, but much depends on the efficacy of the vaccine rollout and the impact of stimulus measures.
Trade volumes are forecast to grow by 8.1 per cent this year before growth settles around 6 per cent in 2022.
Oil prices will be supported by rising demand as growth recovers but will remain below 2019 levels, while gold prices will moderate as safe-haven demand eases.
China is expected to record 8.1 per cent GDP growth in 2021 built on its state-led investment drive, central bank liquidity support and effective COVID-19 containment measures.
India is expected to post growth of 11.5 per cent in 2021.
Sub-Saharan Africa is forecast to grow by 3.2 per cent.
Public debt rose sharply in 2020 due to large fiscal stimulus measures and falling tax revenues. Global public debt grew from 83.5 per cent of GDP in 2019 to 97.6 per cent of GDP in 2020.
South Africa’s real GDP is not expected to return to pre-pandemic levels before the latter part of 2023.
National treasury projects real economic growth of 3.3 per cent this year, from a low base of -7.2 per cent in 2020.
Household consumption is expected to return to moderate growth while gross fixed-capital formation will continue to decline.
Domestic growth will ease to 2.2 per cent in 2022 and 1.6 per cent in 2023.
Household spending grew by 69.5 per cent in the third quarter compared with the previous quarter, but remains below pre-pandemic levels.
Household credit growth in 2020 slowed to less than half of its 2019 rate.
The official unemployment rate rose to 30.8 per cent in the third quarter of 2020.
Headline inflation averaged 3.3 per cent in 2020, its lowest annual rate since 2005.
South Africa is projected to record a 2020 current account surplus of 1.7 per cent of GDP – the first surplus in nearly 20 years.
Treasury pointed out that, since the 2020 Budget Review, the budget deficit has doubled and the in-year revenue shortfall is estimated at R213.2 billion.
At the time of the 2020 MTBPS, this shortfall was projected at R312.8 billion.
The upward revision reflects improvements in personal and corporate income taxes, value-added tax, fuel levies and customs duties.
Main budget revenue is projected to be R1.35 trillion, or 25.3 per cent of GDP in 2021/22. This rises to R1.52 trillion in the outer year (2023/24) of the Medium-Term Expenditure Framework.
The consolidated deficit in the current year – estimated at 14 per cent of GDP – is the largest on record.
Gross national debt is projected to rise from 80.3 per cent of GDP in 2020/21 to 87.3 per cent of GDP by 2023/24, with debt-service costs reaching R338.6 billion in that year.
According to treasury, given the continuing pandemic, the fiscal framework provides short-term support to low-income households and funding for the health policy response.
Changes since the 2020 MTBPS include three-month extensions of the Special COVID-19 Social Relief of Distress Grant and the Unemployment Insurance Fund’s Temporary Employer/Employee Relief Scheme, and funding for the public employment initiative and for provincial hospitals in 2021/22.
Up to R10.3 billion is provided for vaccine rollout for the current year and over the next two years.
Due to uncertainty around vaccination costs, the contingency reserve has been increased from R5 billion to R12 billion in 2021/22.
The consolidated deficit is projected to narrow from 14 per cent of GDP in 2020/21 to 6.3 per cent of GDP by 2023/24. Gross debt-to-GDP is now projected to stabilise at 88.9 per cent of GDP in 2025/26.
Over the medium term, debt-service costs are expected to average 20.9 per cent of gross tax revenue.
Over the next three years, total consolidated non-interest spending is projected to decline in real terms by 0.8 per cent per year. Excluding compensation, however, real non-interest spending continues to grow by 0.4 per cent over the period.
Treasury announced that government will not implement the additional tax revenue measures announced in the 2020 MTBPS – R5 billion for next year, R10 billion per year in the following two years and R15 billion in 2024/25.
Overall, tax revenue projections are higher than the 2020 MTBPS estimates by R85.6 billion in 2021/22, R65.5 billion in 2022/23 and R45.3 billion in 2023/24.
REVENUE TRENDS AND TAX PROPOSALS
Gross tax revenue for 2020/21 of R1.21 trillion is expected to be 10.6 per cent lower than in the previous fiscal year and R213.2 billion lower than projected in the 2020 Budget due to the pandemic.
However, as a result of the recovery in consumption and wages between October and December 2020, and a boost to corporate income tax receipts from the mining sector, 2020/21 revenue collections are expected to be R99.6 billion above the 2020 MTBPS estimate.
The main tax proposals for 2021/22 are:
• An above-inflation increase of 5 per cent in personal income tax brackets and rebates.
• An inflation-linked general fuel levy increase of 15c/litre for petrol and diesel, and an above-inflation increase of 11c/litre in the Road Accident Fund levy.
• An 8 per cent increase in alcohol and tobacco excise duties.
Treasury announced that, in order to support the economic recovery, government will not raise any additional tax revenue in the 2021 Budget.
Tax increases initially proposed in the June 2020 special adjustments budget are withdrawn.
According to treasury, given the better-than-expected revenue performance in the second half of 2020/21, it is no longer necessary to implement measures and their withdrawal will not widen the budget deficit.
Other tax proposals include:
• Inflationary adjustment to apply to the value of medical tax credits, which will increase from R319 to R332 for the first two members, and from R215 to R224 for all subsequent members.
• Corporate income tax rate will be lowered to 27 per cent for companies with years of assessment commencing on or after 1 April 2022.
• The minimum value for paid-up retirement annuities has not been adjusted since 2007/08. This value will increase from R7 000 to R15 000 from 1 March 2021.
• The sunset date for the venture capital company incentive, initiated in 2009 to encourage retail investments in smaller businesses, will not be extended beyond 30 June 2021.
• An inflation-related increase of 15c/litre in the general fuel levy and a higher-than-inflation increase of 11c/litre in the Road Accident Fund levy, with effect from 7 April 2021.
• The carbon tax rate increased by 5.2 per cent, from R127 to R134 per ton of carbon dioxide equivalent, from 1 January 2021. The levy for 2021 will increase by 1c to 8c/litre for petrol and 9c/litre for diesel from 7 April 2021.
• The UIF contribution ceiling will be set at R17 711.58 per month from 1 March 2021.
The increase in excise duties on alcohol and liquor will result in the following price adjustments:
• a 340ml can of beer or cider will cost an extra 14c;
• a 750ml bottle of wine will cost an extra 26c;
• a 750ml bottle of sparkling wine an extra 86c;
• a bottle of 750 ml spirits, including whisky, gin or vodka, will increase by R5.50;
• a packet of 20 cigarettes will be an extra R1.39;
• 25 grams of piped tobacco will cost an extra 47c; and
• a 23-gram cigar will be R7.71 more expensive.
CONSOLIDATED SPENDING PLANS
Total consolidated spending amounts to R2 trillion each year over the medium term, the majority of which goes towards social services.
The bulk of the spending is allocated to learning and culture (R402.9 billion), social development (R335.2 billion) and health (R248.8 billion) in 2021/22.
Debt-service costs increase at an annual average rate of 13.3 per cent and will reach R338.6 billion in 2023/24.
To reduce growth in the public-service wage bill, proposed reductions to consolidated salary spending amount to R303.4 billion from 2020/21 to 2023/24. This consists of R160.2 billion announced in the 2020 Budget and an additional R143.2 billion over the medium term.
Main budget non-interest spending will grow from R1.56 trillion in 2021/22 to R1.57 trillion in 2023/24.
The majority of funding for new and urgent priorities is provided through reprioritising and reallocating existing baselines.
Overall, baselines will be reduced by R264.9 billion over the Medium-Term Expenditure Framework period.
In 2020/21, R12.6 billion was allocated to various sectors to create about 694 000 short-term jobs and the programme is expected to continue in 2021/22.
The Land Bank, which defaulted on its debt in April 2020, is set to receive R7 billion in recapitalisation over the medium term to put it on a stable and sustainable development path.
Government also plans to finalise 1409 restitution claims at a cost of R9.3 billion over the next three years to achieve redress and equitable access to land.
The small business development department has allocated R4 billion over the medium term to township and rural enterprises, including blended finance initiatives.
The tourism department has reprioritised R540 million over the medium term to establish the Tourism Equity Fund as one of the measures to support the tourism sector recovery.
DIVISION OF REVENUE AND SPENDING BY PROVINCES AND MUNICIPALITIES
Over the next three years, after providing for debt-service costs, the contingency reserve and provisional allocations, 48.7 per cent of nationally raised funds are allocated to national government, 41.9 per cent to provincial government and 9.4 per cent to local government.
According to treasury, provinces and municipalities play a critical role in the public health response to the COVID-19 pandemic in line with their spending capacity.
As of January 2021, provinces had spent R12.8 billion, or 60.2 per cent, of additional COVID-19 funds provided by government. Between March 2020 and February 2021, municipalities spent R4.2 billion of a budgeted R11 billion added to the local government equitable share.
Provinces will receive R3.5 billion from the social development department to improve access to early childhood development services.
R6.3 billion is also allocated to extend the special Covid-19 social relief of distress grant until the end of April 2021.
Adjustments to social assistance grants include:
• R30 increase for the old age, disability and care dependency grants to R1890.
• R30 increase in the war veterans grant to R1910.
• R10 increase in the child support grant to R460.
• R10 increase for the foster care grant to R1050.
IN THE PIPELINE
A National treasury discussion document proposing legislative amendments to South African Revenue Service governance, delayed by COVID-19, will soon be published. The document outlines processes to appoint and remove a commissioner and the setting up of at least two deputy commissioners and an executive committee. It also considers measures to improve governance and integrity oversight processes, including the feasibility of a governance board, an inspector-general and mechanisms to account to the finance minister.
Government plans to reduce the number of tax incentives, expenditure deductions and assessed loss offsets in order to lower the corporate income tax rate over the medium term.
Treasury will soon publish a discussion paper on proposals to tax electronic nicotine and non-nicotine delivery systems. The plan is to introduce an excise duty later in the year following public consultations.
A draft bill to impose levies on the financial sector is expected to be tabled in early 2021 with the resulting revenue funding the Prudential Authority, the Financial Sector Conduct Authority and other entities and activities outlined in the Financial Sector Regulation Act.
Treasury and the science and innovation department will publish a discussion paper inviting public comment on the future of the research and development tax incentive set to expire on 1 October 2022.
Treasury plans to table the Draft Public Procurement Bill before cabinet before the end of 2021.
Treasury also plans to review current travel and home office allowances to “investigate their efficacy, equity in application, simplicity of use, certainty for taxpayers and compatibility with environmental objectives”.
Draft legislation will be tabled in 2021 to replace the Road Accident Fund (RAF) with a new system. Treasury wants to address the RAF’s accumulated liability.