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Finance Minister Tito Mboweni made several announcements in his Medium-Term Budget Policy Statement (MTBPS) on Wednesday (Oct 28) that will likely have a direct impact on the pockets of South Africans, says Hannes van den Berg, director Executive of Momentum Consult.
In an analysis of Mboweni’s speech, van den Berg said that South Africans will be directly affected by the points raised by the finance minister, specifically:
- Tax increases;
- Possible further downgrades of the credit rating, leading to the weakness of the rand, which will affect prices;
- Weak growth forecasts mean that South Africans will be poorer in real terms;
- All workers may obtain tax deductions on contributions to provident funds;
- Workers will get additional social protection, such as a fund to cover those excluded from pension coverage;
- There are plans to introduce new legislation allowing withdrawals before retirement;
As a default bonus, the prescribed assets were not raised as a method to cover South Africa’s growing budget deficit, which will be good news for savers.
These are explained in more detail below:
1. Tax increase
The most obvious impact will be felt through the introduction of planned tax increases.
Although details will only be announced during the 2021/2022 budget speech, the proposed increase from R5 billion of additional tax revenue in 2021/2022, to R15 billion in 2024/2025 will have a negative impact on after-tax wages of people, company profits, dividends to shareholders and property values of the deceased, ”he said.
These tax increases could hurt more than expected, given that South Africa’s projected budget deficit is now R 707 billion and faces the real possibility of further downgrades from credit rating agencies.
2. Downgrades
Despite the negative downgrade from rating agencies over the past two years, South Africa risks being further downgraded to the proper rubbish category, van den Berg said.
“This will further increase the government’s interest burden and make the rand weaker even more,” he said.
Generally speaking, further markdowns make it even more expensive for the government to raise capital in the market, but the consequences of these moves, such as the weak rand, invariably trickle down and hit consumers.
The rand’s weakness hits importers especially hard, which translates into higher prices for goods and services, while also causing knock-on effects on things like fuel prices.
3. We are getting poorer
Van den Berg said the budget deficit is exacerbated by South Africa’s weak growth forecasts and the economy is now expected to grow 3.3% in 2021, 1.7% in 2022 and 1.5% in 2023. He said that South Africa and all its citizens are getting poorer.
“Investors have seen poor equity returns over the past five years, and the latest economic growth forecast for South Africa does not bode well for future equity returns, either. “Retirees, in particular, will be hit hard by low interest rates coupled with low equity returns.”
4. Pensions and retirements
Mboweni announced several budget changes that will have an impact on the retirement and pension plans of some South Africans, specifically that the government had reached an agreement with its Nedlac partners around the annualization of provident funds.
“In the area of social protection, we are pleased to announce a landmark agreement with all constituencies in Nedlac for the annualization of provident funds as of March 2021, which will allow all workers to continue to enjoy tax deductions on their contributions.
“We thank the labor constituency for identifying appropriate annuity products for low-income workers,” said the Finance Minister.
Rowan Burger, head of Client Strategy at Momentum Investments, said this news is welcome as proposals to try to optimize pension and provident funds have finally come true.
“Given the generous grant awarded, the annuity purchase only applies to future contributions and people under the age of 55 now, which means the benefit of this proposal will take a long time to see in our annuity sales,” he said.
“We had asked for a communication plan to alert pension fund members about this change, but this is not mentioned.”
5. Social protection
Mboweni said that Nedlac’s partners had also agreed to additional social protection for informal workers.
“Nedlac constituencies also agree to accelerate the introduction of automatic enrollment for all employed workers and the establishment of a fund to serve workers currently excluded from pension coverage, as an urgent intervention towards a comprehensive social security system. “said the finance minister. said.
The Treasury has believed for several years that automatic enrollment would improve coverage, Burger said.
“We have highlighted that the coverage gap is mainly for informal and atypical workers. Members of the Department of Social Development consider this fund to be a precursor to the National Social Security Fund.
“From a business perspective, we recognize that we simply cannot offer a low-cost solution in this space, but we need the limits to protect the existing system.”
7. Pre-retirement withdrawals
Mboweni also announced plans to introduce new legislation allowing withdrawals before retirement..
“The government will introduce legislation next year to allow limited withdrawals before retirement under certain circumstances tied to mandatory retention requirements,” Mboweni said.
The workers’ request for immediate access to retirement savings during the initial Covid-19 period highlighted a rigid system that could not easily allow it, ”Burger said.
“However, it presented an opportunity for a future system that allows access but also mandates preservation. From the positivity, in the statement, it seems to have received wide support from the workers.
Bonus: no prescribed assets
Commenting on key budget announcements, Reza Hendrickse, portfolio manager at PPS Investments, said the finance minister delivered a reasonably balanced budget under the circumstances, with no major surprises or obvious goals of his own.
“Important issues such as the wage bill of the public sector and state companies were addressed in passing, however, a lot of emphasis was placed on the fiscal measures that are being implemented to realign the composition of consumer spending towards investment.”
“Savers will be relieved to learn that prescribed assets are unlikely to be used to cover a funding gap.”
Instead, as anticipated, the National Treasury is focused on trying to reduce the costs of debt service, which with current yields crowds out most investments and makes it difficult for the government to prioritize anything else, Hendrickse said.
Read: South Africa Mid-Term Budget Summary 2020
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