Four things South Africans should expect from the Budget Speech

On 26 February 2020, Finance Minister Tito Mboweni will give what may be one of the most important South African Budget Speeches since 2000.

With the sword of a potential (some might say, likely) downgrade of South Africa’s sovereign credit rating over his head, near-record unemployment levels, and limited fiscal room, Minister Mboweni needs to bring bold reforms.

In order to restore business and investor confidence, he’ll need to take steps that will be unpopular with taxpayers and constituencies like the trade unions.

Here are four key points I expect the Budget will address:

1. National minimum wage

After numerous years of political debate, a national minimum wage came into effect on 1 January 2019.

Despite union concerns that it does not reflect a genuine living wage, and business concerns about affordability, a minimum wage that sets a baseline for industries that did not previously have a regulating measure was a step in the right direction.

It will be interesting to see the statistics on employer compliance. Trade unions are pushing government to hike the minimum wage by 12.5% this year. Will government grant this when unemployment is so high and growth so low?

With recent changes in employment equity reporting requirements, government has access to more accurate data about wage disparities between the highest and lowest paid employees in local companies.

Given this information about wage gaps into different industries, government may be better placed to set benchmarks for different sectors.

2. Tax increases

According to Mboweni’s Medium Term Budget Policy Statement in October 2019, without any policy adjustments, government debt will most likely exceed 70% of GDP by 2022/23. National debt is anticipated to increase dramatically from R3.2 trillion to R4.5 trillion over the next three years, and government requires an additional R150 billion over the same period in order to meet fiscal targets.

With debt-riddled State-owned enterprises, new spending priorities like the National Health Insurance (NHI), and the continuous need to invest in services and infrastructure, government will need to raise more taxes and cut back on spending.

Higher fuel levies and sin taxes are guaranteed, but it is also possible that we will see more personal income tax increases, or another VAT increase, or possibly both. There is not much room to manoeuvre.

SARS reports that only about three million taxpayers paid 97% of income tax last year. Taking more money out of their pockets could inhibit economic growth and reduce tax receipts in future years.

Drastic cutbacks on government spending will not only be politically unpopular, but will also damage economic growth – Minster Mboweni has a delicate balancing act to pull off.

3. Unemployment

While unemployment sits at nearly 29%, and youth unemployment at over 50%, joblessness is one of the leading sources of suffering, and poses a threat to social stability in South Africa.

The outlook is grim, particularly with companies across various sectors – financial services, retail, telecoms, and technology – announcing their intention to retrench thousands of workers over the past few months.

Government will need to take drastic steps to address the unemployment crisis.

Streamlining the administration of the Employment Tax Incentive would be a good place to start. Although well-intentioned, many small businesses find it onerous to administer this incentive and prefer not to claim.

There are various other schemes that could be better explained and marketed, like the Youth Employment Service (YES) programme, which is a partnership between business, government, and labour. YES aims to create one million jobs for youth. By being part of this process, firms can gain a level or two on their B-BBEE scorecards.

4. Retirement funds

A couple of years ago, National Treasury standardised how all types of retirement funds (provident, pension, and retirement annuity) are treated under South African tax law. An employer’s contribution towards any of the abovementioned funds are now treated as a taxable fringe benefit for the employee.

Tax deductions are allowed for both the employee contribution and the fringe benefit of these funds (subject to certain limits), whereas in the past, no deduction was allowed for provident fund contributions.

National Treasury also proposed that the treatment of pay-outs should be aligned. Much like members of other retirement funds, provident fund members would only be allowed to cash out one third as a lump sum on retirement and would be obliged to annuitise the remaining two thirds. Implementation of this annuitisation requirement has been postponed several times, most recently to March 2021. While there is trade union opposition on this issue, it would be interesting to see if government will finally bite the bullet on it.

If, in the end, the pay-outs for all classes of retirement funds cannot be aligned, the reforms may need to be rolled back, and contributions would need to be treated in the same way as they were in the past.