‘Where there is no plan, the budget is the plan’ So, what does this mean?
Well, let’s take two prominent economic and spending plans, the National Development Plan 2013 and the National Health Insurance Bill 2023. The one thing both these plans lack is a financing and spending budget, without which there can be no implementation plan with timelines. It is then left for the Budget to ‘find the money to make things work’, that is, the Budget and National Treasury become responsible for coming up with a financing and implementation plan, including timelines, but within the constraints or all the other ‘plans’ from government. We can then in such cases call it the ‘Budget Plan’… and it’s just that, a plan and with no real income nor spending, which depends on ‘life happening’ and the rest of government executing the spending. The rest of government and public sector unions are usually equally unhappy about the Budget Plan not aligning to their plans, hence them seldom keeping to it.
The Budget Plan has since 2013 had the goal to grow the economy and relieve poverty. It sought to do this by consolidating expenditure (ie reducing the gap between income and expenses) and stabilising debt. This was necessitated by the large spending and debt spree government went on between 2008 and 2012.
What we know is that 11 years later we have not achieved this, as debt has gone up 50% since then and the deficit has remained large, though projected to shrink every year, including for the 2025−2027 fiscal years.
The Minister noted that shocks like COVID, disinvestment from capital infrastructure and wage bill costs (including lack of productivity) have contributed to undermining the budget, therefore raising questions around the credibility of the budget. This is reflected by South Africa going from a BBB credit rating (low risk) to BB- (junk status). This has also contributed to higher levels of inflation, higher interest rates, devaluation of the SA rand and stagnant growth.
So, has the Budget Plan addressed this? The answer is no, and here is why.
The most controversial matter that has not been incorporated in the Budget for five years, and which seemed inevitable after SONA 2024, is the National Health Insurance Bill 2023. Though the plan was to implement this into law, the Budget Plan says there is no money, and only R1,4 billion for administrative research was allocated to this project. This may come as relief to many.
Next was the wage bill. Government put its proverbial foot down in 2021, winning a court case when the courts concluded the law requires the Minister of Public Service to get the budget approved before the wage increase amount is negotiated, or otherwise get specific approval after the fact before agreeing to specific amounts. In September 2023 the Public Servants Association (PSA) agreed a 7,5% increase for the public sector for 2023/2024 (an above inflation increase which was agreed to at the end of the fiscal year) and 6,5% for 2025 (the fiscal year that starts 1 April 2024). For the two years thereafter, nothing has been agreed. The Budget Plan provides for R146 billion over the next three years for additional wage costs that were not previously in the Budget Plan. Public Sector wages therefore will continue to crowd out other expenditure required and seemingly on the same after the fact basis as before.
What happened to growing the economy? Well, no additional funding for capital infrastructure has been provided and in fact conditional grants to departments and provinces that cover cross provincial services and specific projects like capital projects; were reduced by R27 billion. The Budget Plan has also provided no funding to critical State-owned enterprises (SoE) like Eskom, Prasa, Transnet and PortsSA, not to mention the South African Post Office (SAPO) and Denel. Transnet only got surety for R47 billion to borrow money, which reduces its solvency and increases its interest cost even (this despite it making a R5 billion per annum loss). This is the very same approach that got Eskom into trouble. Municipalities, the last mile capital infrastructure provider for water, electricity, roads, sanitation etc got no additional allocations, this despite the fact that 169 out of 257 municipalities are in financial distress.
So, that begs the question: if capital infrastructure investment is per the Minister ‘the goose that lays the golden eggs’ and neither the public or private sector is funding this investment, how will the goal of the economic policy be reached and the 29 million people now reliant on the state through grants or unemployment find relief?
At least the Minister, in the Budget Plan, found R4,1 billion to fund South African Police Service (SAPS) VIP protection for politicians (32% growth since 2019) and an additional R200 million to fund current political parties. The question begs whether these are really priority expenses and what this says about the cohesiveness and credibility of the Budget Plan.
The fiscal consolidation as mentioned in the 2023 medium-term budget required not only slowing public spending but getting more revenue through tax increases. To spread the pain across the private and public sector ‘bracket creep’ tax increases were introduced for the next three years to tax inflationary wage increases and bonus payments. For this first time it was applied at 0% adjustment across all tax bands. What does this mean for the man on the street? Let’s take three bands of salaried employees and assume they each get a 5% salary increase per year for the next five years. The below is a comparison of the difference in take home pay under the current proposal versus what could have been had tax brackets been adjusted for inflation.
For the low-income earning employee earning R8 333 per month in 2024, their monthly take home pay will be R236 less in three years’ time, R2 036 less for the middle-income earner earning R41 666 per month and R5 386 per month less for the high-income earner earning R83 333 per month.
The above demonstrates that the ‘bracket creep’ stealth tax is going to be material and taxpayers should prepare for this hit together with all the other cost pressures.
The Budget is in principle a simple thing. Don’t spend more than you earn, pay for large items from savings, invest in your earning capacity, and if you borrow money, ensure you are adding to your earning capacity and getting a good deal. The Budget Plan is not taking this kind of language into consideration yet. South Africa does not seem to have the discipline or political will to suffer the consequences of our previous actions and do what’s necessary to ensure a better future for all. The risks of the Budget Plan failing again are high given the economic decline and uncertainty, fundamental infrastructure challenges and the fact that the Budget Plan ignores certain expenses (such as the R120 billion legal liabilities) and defers paying certain expenses (for example municipal and SoE creditors) whilst others are kicked down the road for incurral at a future date (such as infrastructure spending). Though our people and businesses have remained resilient, notwithstanding all the daily challenges they face, something has to give, and we all hope that this something is the political will to change for the better for all of SA Inc and its people.
Author
Pieter Faber, Senior Executive: Taxation • Standards
