Wednesday, 26 February 2020

Cape Town: Tabling a very difficult budget, accompanied by a revenue shortfall amid low growth, Finance Minister Tito Mboweni said government needed to implement reforms and clean house to set the country on a path of recovery.

While the Budget Review document lists issues such as excessive medico-legal claims, and excessive salaries and bonuses for executives at State-owned entities, Mboweni said it is time to look at a review of government perks like subsistence and travel allowances, and perks for office bearers such as free cars.

National Treasury has revised economic growth projections down to 0.9% for 2020, amid a projected revenue shortfall of R63 billion.

“We will propose a new law to stop excessive salaries at public entities. We must deal decisively with the high cost of leasing government buildings. We are already acting on fruitless and wasteful expenditure,” Mboweni said on Wednesday while tabling the Budget Speech.

To deal with escalating costs, government will abolish the current wasteful subsidence and travel system, will replace the cell phone policy and stick to economy class travel for all domestic flights, except for exceptional circumstances.

Briefing journalists ahead of the Budget Speech, Mboweni said it was time to clean house.

“There is too much wastage… We must make sure that all the areas of wastage identified by the Auditor-General are sorted out,” he said.

In the Budget Review, National Treasury said reforms that are currently being put in place include:

• Procurement: The draft Public Procurement Bill has been gazetted for public comment to make State procurement more efficient.

• Provincial grants: Government has made progress in reducing unfunded municipal budgets and is piloting initiatives to improve municipal revenue collection. Following a review, government is introducing several changes to the provincial grant system.

• Medico-legal claims: Medical malpractice claims and litigation against the State have increased rapidly in recent years. Although in many cases the quality of care is insufficient, the increase in claims is inconsistent with certain indicators of health outcomes in the public sector. Work has begun to limit unreasonable claims against the State.

• Public office bearers: There will be no increase in the salaries of public office bearers in 2020/21. This follows a reduction in benefits stemming from changes to the Ministerial Handbook.

National Treasury said over the period ahead, interventions that will be undertaken include:

• Conducting a review of government incentives: Those that

are found to be redundant, inefficient or inequitable will be repealed or redesigned.

• National Treasury and the Department of Planning, Monitoring and Evaluation are undertaking a new round of expenditure reviews to identify cost savings and improve efficiency.

• Government’s intention is to publish a new law this year to introduce a remuneration framework for public entities and State-owned companies. One goal of this legislation is to eliminate excessive salaries and bonuses being awarded to executives and managers.

National Treasury said in its review document that over the next year, National Treasury and the Department of Public Service and Administration will improve the wage setting mechanism; report on the causes of unauthorised and wasteful expenditure, and examine ways to reduce State litigation, accommodation and information technology costs.

SABC to get R1.1bn cash tranche in March

The public broadcaster, the SABC, is expected to get the remaining R1.1 billion of its R3.2 billion bailout by the end of next month, the National Treasury said on Wednesday.

This comes after the SABC Board was informed that it would get the bailout in phases – provided that it meets certain conditions as part of its turnaround strategy.

“The remaining R1.1 billion is expected to be transferred to the SABC by 31 March 2020,” said Treasury on Wednesday, during the tabling of the 2020 Budget Speech.

Additional funding of R576 million for Denel

Meanwhile, state-owned military and aerospace equipment manufacturer, Denel, which is facing serious liquidity problems, would be allocated an additional R576 million

Government’s initial response to the entity’s challenges was an allocation of R1.8 billion in 2019/20.

“State guarantees granted to the entity amount to R6.9 billion. Additional funding of R576 million is allocated for 2020/21.

Transnet borrows on the strength of its own balance sheet

National Treasury said Transnet’s net profit increased from R4.9 billion in 2017/18 to R6 billion in 2018/19, supported by fair-value adjustments on leased investment properties.

“Transnet, which borrows on the strength of its own balance sheet, raised R6.7 billion through commercial paper, bank loans and development finance institutions in 2018/19.

“It invested R14.7 billion to maintain rail and port capacity, and R3.2 billion to expand infrastructure and equipment.” said Minister Mboweni.

Social grants increased

Social grants will in the next financial year increase by between 4 and 4.7%, Finance Minister Tito Mboweni has announced.

The seven social grant categories will increase by between 4 and 4.7%. In this regard, old age and disability grants will increase by 4.5% to R1 860, up from R1 780.

Persons over the age of 75 and war veterans will now receive R1 880, up from R1 800.

Foster care will increase from R1 000 to R1 080, care dependency rises from R1 780 to R1 860. Child support will now be R445, up from R425.

Billions allocated for improved education

Government expenditure on learning will in three years reach R434.2 billion, Finance Minister Tito Mboweni has revealed.

This comes as the state aims to develop the capabilities of citizens from early on in childhood.

Government continues to provide access to education, training and skills development, as well as strengthen social cohesion.

The department will also introduce subjects like coding, data analytics and robotics, and improving school sanitation and the quality of teaching.

The school infrastructure backlogs grant is allocated R5.6 billion to provide water, sanitation facilities and electricity to schools, and replace schools constructed with inappropriate materials.

The national school nutrition programme grant is allocated R24.3 billion over the next three years to provide meals to nine million learners in almost 20 000 poor schools (quintiles 1 to 3) and identified special schools.

Post-school education and training

The medium-term focus in this sector will see government expand access to universities and Technical and Vocational Education and Training (TVET) colleges, improve their performance, develop artisans, and support work-based learning.

Focus will zoom in on strengthening management and governance of community education and training colleges.

“Expenditure for the National Student Financial Aid Scheme increases at an average annual rate of 7.3% from R33 billion in 2019/20 to R40.8 billion in 2022/23,” reads the report.

The institution expects to fund more than one million students at universities and more than 870 000 students at TVET colleges over the period.

Also, the Department of Higher Education and Training will re-allocate existing funds to undertake a feasibility study for the establishment of a new university of science and innovation in Ekurhuleni.

R15 million set aside for GBV council

National Treasury will over the next three years allocate an additional R15 million for the establishment of a National Council to combat gender-based violence and femicide.

 “Its budget will increase to R853 million in 2022/23, with a focus on strengthening interventions for women’s economic empowerment; promoting the rights of people with disabilities; and supporting youth development,” said Treasury in the 2020 Budget Review on Wednesday.

The courts will bring relief and justice to survivors of gender-based violence (GBV).

Plans to curb medico-legal claims

The National Treasury has unveiled plans aimed at curbing soaring medical malpractice claims and litigation hovering at R100 billion.

In a Budget Review, the National Treasury said claims had increased rapidly.

The department said the effect of these interventions on state contingent liabilities still needs to be evaluated. Long-term solutions may require wider legal reform, which the South African Law Reform Commission is exploring.

Sin Taxes increas

Smokers and drinkers will from Wednesday have to dig deeper into their pockets for cigarettes and alcohol.

This comes after Finance Minister Tito Mboweni in the 2020 Budget Speech announced increases of between 4.4 and 7.5% in excise duties on alcohol and tobacco.

From Wednesday, a 340ml can of beer or cider will cost an extra 8c while a 750ml bottle of wine will cost an extra 14c.

Other increases will see a 750ml bottle of sparkling wine cost an extra 61c, while a bottle of 750ml spirits, including whisky, gin or vodka, will rise by R2.89.

A packet of 20 cigarettes will be an extra 74c, while a 25 gram of piped tobacco and a 23 gram cigar will cost an extra 40c and R6.73, respectively.

SA readies to establish state bank

Government is ready to establish a state bank, Finance Minister Tito Mboweni said on Wednesday.

“In July 2019, I tasked the Deputy Minister of Finance with the responsibility to undertake the state bank project… I am pleased to inform the House that preferred options for the establishment of a bank are now ready,” he said in Parliament.

The Minister’s comments come after Parliament last year passed legislation to allow state-owned enterprises to apply for banking licenses.

The architecture of the proposed bank will be that of a retail bank operating on commercial principles.

The bank will be subjected to the Banks Act, and will have an appropriate capital structure and performance parameters on investments and loan impairments.

“It will be regulated by the Prudential Authority on its own merits. We will also consolidate the currently fragmented system of national and provincial Development Finance Institutions,” he said.

The PA is responsible for regulating banks, insurers, cooperative financial institutions, financial conglomerates and certain market infrastructures.

SA Sovereign Wealth Fund

Meanwhile, Mboweni also announced the formation of the South African Sovereign Wealth Fund.

The fund is an important long-term tool for saving and investment for future generations.

“Today, we announce the formation of the South African Sovereign Wealth Fund with a target capital amount of about R30 billion, which converts to about US$2 billion or so. Given the legal, administrative and procedural issues involved, a relevant bill will be submitted during the course of this Parliament,” he said.

He said the fund could also contribute to strengthening the fiscal framework, and could also play an important role as a counter-cyclical fiscal tool.

State wage bill to be slashed by R160bn over three years

Government will over the next three years attempt to reduce the public sector wage bill by R160 billion, Finance Minister Tito Mboweni said on Wednesday.

The intervention comes as the state attempts to reduce high spending on salaries in the sector.

“Public servants do crucial work for our country, often in trying conditions. The governing party is a firm believer in the critical role of the state in development. For this reason, we need qualified, motivated and effective staff,” said the Minister.

Working with the public sector unions, government has over 15 years sought to improve the lot of public servants.

“We have committed significant resources for compensating them every year even as we have tried to increase their numbers in recognition of their demanding workloads,” he said.

Between 2006/07 and 2011/12, the state added about 190 000 employees. However, wages also increased significantly.

Government sets aside R16.4bn for SAA

Government has set aside R16.4 billion to repay guaranteed debt for the struggling airline SAA, the National Treasury said on Wednesday.

This comes after the SAA Board placed the airline under voluntary business rescue in December last year after the struggling state-owned entity was unable to meet financial obligations.

“Since 2008/09, SAA has incurred net losses of over R32 billion. Government has set aside R16.4 billion for SAA [over the next three years] to repay the airline’s guaranteed debt and to cover debt-service costs.

“The costs of this adjustment are still being finalised, and will be financed from existing provisional allocations for state-owned companies,” the National Treasury said.

Government to assess its appetite for continued ownership of SA Express

The National Treasury said SA Express, illiquid and insolvent, is unable to settle either short or long-term obligations as they become due.

Cumulative losses amount to R1.2 billion over the past 10 years.

“The airline was recently placed under involuntary business rescue, which it intends to appeal.

“Government will need to assess its appetite for continued ownership of the carrier, given that it has a limited role in the local aviation market.”

Eskom’s financial support remains unchanged

The National Treasury said, meanwhile, that over the past 12 years, government has allocated R162 billion to financially distressed state-owned companies, of which Eskom accounts for 82%.

In its budget review, the National Treasury said the fiscal support for Eskom, as outlined in the 2019 Medium Term Budget Policy Statement (MTBPS), remains unchanged.

“Over the next three years, government will transfer R112 billion to Eskom to enable the utility to meet its short-term financial obligations.

“The roadmap on Eskom, published by the Minister of Public Enterprises, outlines the reform process.

“Eskom has begun the process of separating its three operating activities – generation, transmission and distribution – each of which will soon have its own board and management structure.”

The National Treasury said these are the first steps in the necessary restructuring of South Africa’s electricity sector for the 21st century.

Economic growth revised downward to 0.9%

South Africa’s economy is expected to grow by 0.9% in 2020, National Treasury said on Wednesday.

This is a downward revision from the 1.7% projection made in the February 2019 budget.

In its budget review just over a year ago, Treasury had projected real economic growth of 1.5% in 2019 and 1.7% in 2020.

“We now expect real growth of only 0.3 per cent in 2019 and 0.9 per cent in 2020. In 2019, consolidated government spending reached a historic high of 36% of GDP [Gross Domestic Product],” said Treasury in the current budget review.

The increase it said, reflects downward revisions to the size of the economy, spending plans based on an assumption of economic growth that has not materialised, and increased demands from financially distressed state-owned companies.

Treasury said while that makes a significant contribution to development, this level of spending is unsustainable, and results in continued high deficits and debt accumulation.

 Increased borrowings

In addition, the impact of low growth on revenue collection has been a considerable one.

“Government expects to collect R63.3 billion less revenue than projected at the time of the 2019 Budget. The state is borrowing at an increased rate to fund operations, with the deficit projected at 6.3 % of GDP this year.”

Debt-service costs now absorb 15 cents of every rand government collects.

The National Treasury said that by 2022/23, interest payments will exceed health spending.

Tax proposals put money back into the pockets of consumers

Despite a tough economic climate and a revenue shortfall of R63 billion, Finance Minister Tito Mboweni has announced tax measures that will give consumers some room to breathe.

For example, a teacher who earns on average R460 000 a year will see their taxes reduced by nearly R3 400 a year, while hard-working tax payers, who earn on average R265 000 a year, will see their income tax reduced by over R1 500 a year.

“Indeed there is some real personal income tax relief. Our income tax system is progressive and the adjustments reflect this. Someone earning R10 000 a month will pay 10% less in tax. Someone earning R100 000 a month will pay about 1.5% less.”

He said the proposal for no major increases was in line with the National Treasury’s aim of supporting growth.

The Minister also said that the National Treasury was proposing broadening the corporate income tax base. The additional revenue, the Minister said, would be used to reduce the corporate tax in the near future to help businesses grow.

“Start-ups will ignite the economy. The tax system supports them in a number of ways, including the preferential small business tax regime, the VAT registration threshold and the turnover tax. We will review these to improve their effectiveness while at the same time reducing the scope of fraud and abuse,” he said.

In its Budget Review document, the National Treasury has announced an above-inflation increase in the personal income tax brackets and rebates.

“Personal income tax brackets and the primary, secondary and tertiary rebates will be increased by 5.2% for 2020/21, which is above expected inflation of 4.4%.

“This adjustment provides R2 billion in tax relief. The change in the primary rebate increases the tax-free threshold from R79 000 to R83 100,” the National Treasury said.

Why National Treasury won’t raise revenue from tax proposals

The National Treasury said on Wednesday that over the past five years, government has implemented large tax increases.

However, the difference between projected and collected revenue has grown progressively larger in the face of a persistent slowdown in economic growth and a weakened SARS.

“Growth in wages, consumption and business profitability has stagnated in recent years, lowering tax receipts for personal income tax, value-added tax (VAT) and corporate income tax, which make up more than 80% of total tax revenue.

“In this context, substantial tax increases are unlikely to be effective. South Africa already has a relatively high tax-to-GDP ratio compared with other countries at a similar level of development.

“New tax increases at this time could harm the economy’s ability to recover. Consequently, government will not raise additional revenue from tax proposals for 2020/21.”

Additional revenue from indirect taxes will be offset by personal income tax relief.

The main tax proposals for 2020/21 are:

  • Providing personal income tax relief through an above-inflation increase in the brackets and rebates;
  • Further limiting corporate interest deductions to combat base erosion and profit shifting;
  • Restricting the ability of companies to fully offset assessed losses from previous years against taxable income;
  • Increasing the fuel levy by 25c/litre, consisting of a 16c/litre increase in the general fuel levy and a 9c/litre increase in the RAF levy, to adjust for inflation;
  • Increasing the annual contribution limit to tax-free savings accounts by R3 000 from 1 March 2020; and
  • Increasing excise duties on alcohol and tobacco by between 4.4 and 7.5%.

Consumers to save tax on foreign earnings

The National Treasury said, meanwhile, that government will, from next month, increase the cap on the exemption of foreign remuneration earned by South African tax residents to R1.25 million per year from 1 March 2020.

“Some advisors have recommended emigration, as recognised by the Reserve Bank, as a way to break tax residency.

“However, this is only one factor considered by SARS. Government wants to encourage all South Africans working abroad to maintain their ties to the country. Consequently, this concept of emigration will be phased out by 1 March 2021.”