South African Budget Speech 2022 Recap

2022 BUDGET HIGHLIGHTS

The backdrop to this year’s budget is two years of Covid-19 and our future recovery efforts. Households are cash-strapped and trying to make ends meet due to job losses and business failures arising from the ravages of the pandemic. The South African economy has rebounded better than expected over the past year and tax collections for 2021 are likely to exceed the February 2021 National Budget projections by in the region of R182 billion. This is also more than R62 billion more than was projected in the Medium-Term Policy Review, largely due to collections resulting from buoyant commodity prices.

It was noted though that commodity prices slowed in the second half of 2021. Violent unrest in July and the restriction of the third wave eroded gains we made in the first half of the year together with industrial action in the manufacturing sector and the re-emergence of loadshedding.

The highlights (or in some cases lowlights) are:

• The revised economic growth estimate is 8% from 5.1% at the time of the MTBPS.
• Of concern still is that R330 billion of South Africa’s tax revenue is going to servicing of debt which has reached R4.3 trillion and is projected to rise to R5.4 trillion over the medium-term. Unless we strengthen the economy urgently and broaden the tax base, more borrowing might be required which we can ill afford.
• GDP growth of 1% is projected for 2022. Over the next 3 years GDP growth is expected to average 1.8%. This is way too low to even make a dent into the unemployment stats.
• SA still has a very high personal income tax (PIT) rate in world terms. PIT falls disproportionately on a small percentage of the tax base. National Treasury has committed to increasing the tax base through greater economic growth, employment and tax collection rather than increasing tax rates. This is unlikely until the informal sector is brought into the tax net.
• It is stated that seven million people in total pay income tax. Two million of them pay only 3% of the income tax. That means that a very small group of people pay the majority of the tax. This is complicated by the fact that 18 million people or 30% of the population receive social grants. This is certainly not a sustainable model and it’s clear that Government needs to make some hard decisions to get the tax burden spread amongst more people.
• The Minister followed through with the commitment to lower the corporate income tax rate to 27% for companies with tax years ending 31 March 2023, alongside a broadening of the corporate income tax base by limiting interest deductions and assessed losses.
• The consolidated budget deficit is projected to narrow from 6% of GDP in 2022/2023 to 4.2% of GDP in 2024/2025.
• Gross loan debt will stabilize at 1% of GDP in 2024/2025. This percentage is still very concerning.
• Debt-service costs consume an increasing share of GDP and revenue. They are expected to average 4 billion a year. This is money that is no longer available to plough into education and infrastructure development.
• Total consolidated government spending will amount to R 6.62 trillion over the next three years, and the social wage will take up 59.4% of total non-interest spending over this period. This tells us how much social welfare drains the fiscus’s coffers.
• Additional allocations of R110.8 billion in 2022/2023, R60 billion in 2023/2024 and R56.6 billion in 2024/2025 are made for several priorities that could not be funded through reprioritisation. These include the special COVID-19 social relief of distress grant, the continuation of bursaries for students benefiting from the National Student Financial Aid Scheme, and the presidential employment initiative.
• The bulk of the spending is allocated to learning and culture (R1.3 trillion), social development (R1 trillion) and debt-service costs (R1 trillion) over the MTEF.
• Tax revenue strengthened significantly in recent months and is expected to reach R1.55 trillion for 2021/2022, well above projections. Corporate income and profit have been more resilient than anticipated and collection of both PIT and VAT has been above expectations.
• Given the revenue improvement, government proposes 2 billion in tax relief to help support the economic recovery, provide some respite from fuel tax increases and boost incentives for youth employment. Most of the relief is provided through an adjustment in PIT brackets and rebates.
• This relief is mainly targeted at individuals in the middle-income groups. The personal income tax brackets and the primary, secondary and tertiary rebates will be increased by 4.5 per cent for 2022/23, which is in line with the inflation rate.
• In a surprising move there was no increase in either the general fuel levy or the Road Accident Fund levy. This will provide tax relief of R 3.5 billion to South Africans.
• Progress continues to be made in rebuilding the South African Revenue Service.
• There is an intention to consult on changes to Regulation 28 shortly to enable greater investment in infrastructure by retirement funds. These changes will be gazetted next month. There has been some resistance to this suggestion, particularly if there is ‘forced’ investment.
• The offshore limit for all insurance, retirement and savings funds is harmonised at 45 per cent inclusive of the 10 per cent African allowance. The previous maximum limits were set at 30 per cent or 40 per cent for different investors.
• There will be further consultation on the two-pot system and the intended draft legislation which will be published for comment in the middle of the year.
• 5% and 6.5% increase in excise duties on tobacco and alcohol products.
• A new tax on vaping products of at least R2.90 per millilitre from 1 January 2023.
• Surprisingly there has been an inflationary increase to the value of the medical tax credits in 2022/2023 from R332 per month to R 347 for the first two beneficiaries, and from R224 per month to R 234 for the remaining beneficiaries. It is a welcome surprise that we are continuing to see inflationary increases in the medical tax credits because it was announcement in the 2018 Budget Review that the credit would be adjusted by less than inflation to help fund the rollout of national health insurance over the medium term. Is the NHI system more problematic than Government is saying?
• Employment tax incentive. To encourage businesses to employ young people, government proposes an increase of 50% in the value of the employment tax incentive, effective from 1 March 2022. The incentive will increase from a maximum of R1 000 to a maximum of R1 500 per month in the first 12 months, and from R500 to a maximum of R750 in the second 12 months of eligibility.

Whilst South Africa has rebounded to recent challenges better than expected, the country is in a deep debt hole that is consuming revenue that could be better spent elsewhere. Taxpayers may have seen some relief in terms of tax rate reductions, but they can rest assured that the ballooning oil price will have a negative impact on the economy as a whole. Taxpayers can expect significant petrol price increases at the pumps and also have to absorb the impact of such increases on the cost of food and other essential commodities. It is going to be a tough year but what else can the resilient South Africans do but to ride it out.