Budget gets nod from markets

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The 2021 budget appeased business and financial markets but it was also an unpleasant shock to many.

Finance Minister Tito Mboweni's 2021 budget was a welcome surprise for individual taxpayers, businesses, and financial markets. The rand appreciated to its strongest level in a year, while the stock and bond markets rallied on news that South Africa’s unsustainable pace of borrowing would be curbed, corporate taxes would be cut and that planned personal tax increases had been scrapped.

Credit rating agencies are now likely to give SA the benefit of the doubt, and further downgrades this year are off the table – there is even speculation that the two agencies which have placed a negative outlook on their ratings for SA's foreign debt may change them to positive.

But the decision to reduce the real value of the social grants on which much of the country's poor depends – particularly after news that unemployment has hit a record high – came as an unpleasant shock to many and will be fiercely resisted by civil society, opposition parties and factions within the ANC itself.

The Treasury’s budget review indicated that social grants would be increased by just 1.6%, well below the forecast inflation rate of 3.9%. It allocated R6.3bn to extend the special Covid-19 social grant to the end of April, but the curbs to social grant increases remain in place for the next three years.

What will disturb those who fight the corners of SA's poor majority even more was Mboweni’s response to questions on the policy decision at a news conference following his budget speech in parliament.

“The political answer to that is there is no need to be apologetic about it. There is no social contract that says every year there must be a certain amount of increase. The allocations we made were what we could afford.”
Minister of finance, Tito Mboweni

Mboweni’s trait of being blunt and outspoken is welcome in many circles but this time, he might have gone too far with what Intellidex analyst Peter Attard Montalto describes as a “my way or the highway” approach – which puts his position at risk.

The fact that tax cuts worth more than R2bn have been offered through the budget decision to raise tax brackets by more than the inflation rate, compounds the political sensitivity around reducing social grants, Montalto said.

There were other anomalies. The hefty budget review document which normally provides all the details of the Treasury’s plans made no mention of the decision to cut the corporate tax rate by one percentage point to 27% – which Mboweni highlighted in his speech to parliament.

In addition, his staunch opposition to the government’s determination to keep SAA afloat was once again evident. Treasury’s budget review noted that in September 2020, the business rescue plan for the airline raised its three-year funding requirement to R19.3bn from R16.6bn.

When questioned about this at the media conference, Mboweni pointedly said that no additional allocation for SAA had been made in the 2021 budget.

While this stand is popular with the public, business and financial analysts, the remarks by the Treasury’s director-general Dondo Mogajane on the feasibility of holding the line on a public sector wage freeze sent a worrying signal about the credibility of the budget’s fiscal targets.

Wage compensation was a line item in the budget and a number had to be there, but it did not dictate what would happen in the public service bargaining council, he told journalists. “It doesn't mean ... that we have already decided on the negotiations. A budget is a statement of political intent,” he said.

Unfortunately, most of the spending restraint and debt consolidation outlined in this year’s budget relies on hefty cuts to the wage bill, which absorbed nearly half of the country’s dwindling tax revenue last year.
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This article originally appeared in the 18 February edition of finweek. You can buy and download the magazine here.

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