The 2021 National Budget Speech signals relief for consumers, companies and investment attraction

SOUTH AFRICA - Report 25 Feb 2021 by Iraj Abedian

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The South African government has stressed on a number of occasions – namely, the Mid-Term Budget Policy Statement, after the sovereign ratings downgrade, the Economic Reconstruction and Recovery Plan, the African National Congress January 8th Statement and the 2021 State of the Nation Address – that its priority is supporting economic recovery and fiscal consolidation. At a time when the government had limited financial capacity to resuscitate the subdued economy that was further crippled by the COVID-19 pandemic, all eyes were on Finance Minister Tito Mboweni’s Budget Speech on February 24, 2021 to gauge how the state plans to actualize these priorities. The Minister’s key political economy message was:

“This is not an austerity Budget”.

By all accounts, it seems Minister Mboweni has recognized that with limited fiscal space, South Africa needs to rely on private sector activity to revive the economy. He has signaled this through tax policy – with a R2.2 billion relief in personal income tax and a 1% drop in corporate income tax (from the current 28% to 27%, effective from April 1, 2022). With adjustments for bracket creep at much higher than CPI, the individuals receive real tax relief. Markets were impressed at the message of consistency from the Minister – with the rand firming and the Johannesburg Stock Exchange closing slightly higher – that perhaps a point of inflection regarding tax increases has been reached. The implementation of these measures is in the hope that this will positively influence economic growth and in the process, tax revenue – reducing the budget deficit from the all-time high of 14% in 2020-21 to about 6.3% in 2023-24. South Africans were also relieved to find out that further purchases of the COVID-19 vaccines would not be funded from tax increases, but through amounts provisioned in the contingency fund. However, this effort to bring relief to South Africans also comes at a cost to the economy in later years. As a case in point: the debt-to-GDP ratio is expected to increase from 81.8% in 2021-22 to 88.9% by 2025; and debt service costs being among the highest in the group of emerging markets, averaging 20.9% of revenue between 2021 and 2023.