By Reza Hendrickse
Despite mounting pressure to raise taxes, no significant tax increases were announced in the 2024 budget speech.
However, this decision has resulted in the need to tap into South Africa’s Gold & Foreign Exchange Contingency Reserve Account (GFECRA) for the first time in two decades.
The South African economy continues to show pedestrian growth, which National Treasury revised down to 0.6% real for 2023. Growth is expected to improve to 1.6% over the next three years, supported by fewer power cuts and lower inflation.
“The pie”, which was Finance Minister Enoch Godongwana’s reference to the SA economy in his address, is simply not growing fast enough.
As a result, tax revenue for 2023/24 is R56.1 billion lower than previously estimated, largely due to lower profits from the mining sector.
Although the medium-term revenue projection is higher than previously estimated, an additional R15 billion will need to be raised through additional taxes in 2024/25 to cover immediate pressures.
Taxpayers will be relieved to hear that this will not come from changes to personal income tax rates, however, as usual, sin taxes will go up.
Another source of additional revenue will come from multinational corporates now facing a global minimum tax rate of 15%, regardless of where their profits are earned.
The budget deficit is expected to worsen to 4.9% in 2023/24, and for debt servicing costs to rise to 20% of revenue. After accounting for the large share of public sector wages and social grants, leaving very little available to invest in the future productive capacity of the economy.
Understandably, it is very difficult to reduce social grants, and public sector wages are equally challenging, let alone in an election year.
Given limited options available to National Treasury to address the rising debt burden, it was widely speculated that National Treasury might look to tap into the GFECTRA. This represents a R500 billion pool of assets held at the South African Reserve Bank, representing gains and losses on SA’s foreign reserves.
Accessing these reserves is standard practice for most central banks around the world. Godongwana confirmed that R150 billion will be drawn down from GFECRA to reduce public borrowing and lower debt servicing costs.
This, along with the other measures announced by the Minister, allows debt to peak at “only” 75.3% of GDP in 2025/26.
Other notable elements from the Budget include the proposed increase in the limit for renewable energy projects that can qualify for the carbon offsets regime.
The minister recognised the need for private sector involvement in overcoming the challenges faced by Transnet, and also announced support to encourage the production of electric vehicles.
Cash-strapped South Africans can look forward to the prospect of withdrawals from the savings portion of their retirement funds in September, as the two-pot retirement system goes live.
The budget appears to have been well received, given the markets’ muted initial reaction and we look forward to the government’s commitments materialising.
* Reza Hendrickse, Portfolio Manager, PPS Investments.
** The views expressed here are not necessarily those of IOL or of title sites.
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