Ramaphosa Pivots on Budget as South Africa Scraps Tax Hikes

South Africa signaled a shift in budgetary policy, backtracking on planned tax increases as it switched focus to reigniting the coronavirus-battered economy by bolstering consumption and investment.

Finance Minister Tito Mboweni reversed a decision to raise an extra 40 billion rand ($2.8 billion) over the next four years, allocated funds for Covid-19 vaccines and set more ambitious debt-consolidation targets, while sticking to a pledge to freeze state workers’ wages. He also announced inflation-beating relief for individuals, whose taxes have been raised in five of the past six years, and a 1 percentage point cut in corporate tax from April 2022.

Ramaphosa Pivots on Budget as South Africa Scraps Tax Hikes

“We agree that tax increases must be kept to a minimum as we stabilize our public finances,” Mboweni said in his budget speech to lawmakers in Cape Town on Wednesday. “We will not rest until we have fundamentally altered the structure of this economy.”

South African 2021 Annual Budget Forecasts in Brief (Table)

What Bloomberg Economics Says

Debt stabilization “hinges on a yet-to-be-concluded public-sector wage agreement, yet-to-be-implemented reforms, and still-to-be-realized revenue surprises. The risks, therefore, remain elevated.”

--Boingotlo Gasealahwe, Africa economist

-For the full REACT, click here

The approach is a stark change from a decade of swelling civil-service costs and bailouts to state companies that proved an increasing drain on the economy. It’s the clearest sign yet that President Cyril Ramaphosa is intent on averting a debt crisis and driving through reforms needed to galvanize private investment and tackle record-high unemployment.

Political Risk

The pivot toward a lesser role for the state is also politically risky and may suggest the president has stamped his authority on the deeply divided ruling African National Congress, which is preparing to contest local council elections later this year. Ramaphosa’s rise to power in 2018 was backed by the party’s powerful labor-union allies that vociferously oppose the three-year moratorium on wage increases and favor even higher taxes for the rich.

The rand gained as much as 1% to 14.3966 per dollar. Yields on local-currency debt maturing in Jan. 2030 fell 11 basis points to 8.72%.

While South Africa’s finances remain precarious, the situation isn’t as bleak as it was at the time of the mid-term budget in October, thanks to a commodities boom and a partial rebound in consumption and employment. The economy likely contracted 7.2% last year, the worst in almost a century, but less than the 7.8% previously forecast. It’s expected to expand 3.3% this year and 2.2% in 2022.

The Treasury expects to collect 99.6 billion rand more in the year through March than it projected four months ago, reducing the forecast for the budget deficit to 14% from 15.7%. Higher excise duties were imposed on fuel, alcohol and tobacco sales and a levy on scrap-metal exports was introduced. The corporate tax rate will be reduced to 27% next year, the first reduction since 2008.

Ramaphosa Pivots on Budget as South Africa Scraps Tax Hikes

The anticipated peak for state debt was reduced to 88.9% of GDP in fiscal 2026. A primary budget surplus, which excludes interest costs, is seen by 2025 -- a year earlier than previously announced.

“Kudos to the finance minister for digging in his heels. Instead of buckling under constant pressure to spend more, he remains steadfast in pursuit of fiscal discipline,” said Ettienne le Roux, chief economist at FirstRand Ltd.’s Rand Merchant Bank in Johannesburg. “Spending restraint coupled with growth-boosting reforms remains South Africa’s best shot out of the fiscal quandary it’s in.”

Mboweni committed 10.3 billion rand to buy and administer coronavirus vaccines, an allocation aimed at helping the government meet its target of inoculating two-thirds of the population of 60 million. A further 9 billion rand will be placed in a contingency reserve, and can be used to fund shots if needed.

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