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MTBPS 2020: Minister of Finance expected to deliver pragmatic budget  

Authored by: Delia Ndlovu, Managing Director, Deloitte Africa Tax & Legal | Martyn Davies, Managing Director Emerging Markets & Africa, Deloitte Africa | Ashleigh Theophanides, Life Sciences and Healthcare Industry Leader, Deloitte Africa | Billy Joubert, Senior Associate Director, Transfer Pricing, Deloitte Africa Tax & Legal

Johannesburg, South Africa 28 October 2020 - As the Minister of Finance, Tito Mboweni, puts the final touches on his Medium-Term Budget Policy Statement (MTBPS), the biggest issue he must be grappling with is the impact of COVID-19  on the economy.  This has resulted in a perfect storm for our already troubled economy. 

The minister’s speech will be off the back of President Cyril Ramaphosa’s Economic Reconstruction and Recovery Plan presentation, in which he sought to outline immediate actions to rebuild the economy and facilitate economic growth. It will be up to the finance minister to provide the detail of how the fiscus will support this plan.

The market expects a very pragmatic budget, one that takes a strong and definitive position on state financing in order to inject confidence into our economy. The MTBPS is expected to provide some information on structural reforms aimed at growing the economy, as well as provide some detail on the government’s plans to reduce the public sector wage bill, in particular accommodating (or not) the proposed wage increase from labour. The minister is also expected to outline plans on restricting spend allocated to SOEs that could compel the necessary reforms. Also, plans are expected in relation to providing support to the poorest in society to relieve economic hardship and regarding some sort of financial support to sectors heavily impacted by COVID-19 (such as tourism and leisure).

The South African economy was facing enormous challenges even before COVID-19, with a tax revenue base that could not support government spending and a significantly deteriorating debt-to-GDP outlook over the medium term. The pandemic served to further accelerate the challenges. When the finance minister presented the supplementary budget to set out government’s economic and fiscal response to the COVID-19 pandemic in June, he announced that the economy was expected to contract by 7.2% this year. He also revised gross tax revenue for the 2020/21 fiscal year down from R1.43 trillion to R1.12 trillion, meaning that revenue collection for 2020/21 was expected to be down over R300 billion from what was expected when the minister tabled his national budget in February 2020.  This drop in expected revenue is coupled with significant increased spending associated with fighting the pandemic.

The GDP growth forecast is likely to be revised again before year-end.

Will the minister look to increase taxes?

The government has so far been reluctant to increase tax rates as it is acknowledged that we are already a highly taxed country (both individuals and corporates) and there is the distinct risk that squeezing the small (and shrinking) tax base even harder may well prove counter-productive to our economy. Indeed, it came as something of a surprise that all individual tax brackets – even the ones for higher earners - were adjusted at the time of the
2020 budget to compensate for inflation and avoid the phenomenon of bracket
creep which had put higher earning individual taxpayers under increased pressure in recent years.

Introduction of a “Wealth Tax”?

Desperate times call for desperate measures and the possibility of additional taxes cannot be excluded. There have been reports of a proposed new wealth tax, to be referred to as a solidarity tax. Details are still sketchy – with various possibilities being mooted by commentators.

No one can deny that all South Africans are affected by the pandemic in many ways. So conceptually, a solidarity tax, aimed at bridging us over the COVID-19 chasm, might just work.

Such new taxes might be more palatable for jaded taxpayers if it is seen as temporary and based around the philosophy of a social compact aimed at a specific issue – in this case, mitigating the effects of COVID-19.

The possibility of public acceptance of a solidarity tax (or any other form of new tax) will depend greatly on whether taxpayers have reasonable assurance that the money raised will be spent responsibly.

National Health Insurance(NHI)

COVID-19 has highlighted the need for universal health coverage, and access to public health care. However, due to there being limited funding available from the fiscus, government may have to repurpose funding in order to drive any form of new initiatives and be more purposeful in strengthening the health system. In his budget speech address in February, the Minister of Finance articulated a plan focusing on providing care, especially to the vulnerable in a more cost effective way.

In our view, the minister will use the available budget more effectively by trying to reduce money spent on wasteful expenditure. Irregular expenditure increased from R5.5 billion in 2017/18 to R7.37 billion in 2018/19. The government will have to use what resources it has better in order to support universal health coverage.

Additionally, the positive Public Private Partnerships formed in order to support government’s response to the COVID-19 pandemic will hopefully be a catalyst for further partnerships. We don’t see timelines of NHI implementation being brought closer, given the funding gap. Like most programs, the time taken for our economic recovery will influence the level of funding that would be available for implementation of a full-blown NHI.

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