- Finance Minister Enoch Godongwana’s third iteration of the National Budget was finally passed by Parliament on Wednesday.
- The so-called “Budget 3.0” includes a commitment to review government spending, while a planned VAT hike falls away.
- But it also brings a fuel levy hike, and some income tax relief, included in the first version of the Budget, has been canned.
- For more financial news, go to the News24 Business front page.
After two unsuccessful attempts, Finance Minister Enoch Godongwana finally saw Parliament accept the fiscal framework on Wednesday, paving the way for the National Budget to be implemented.
The fiscal framework establishes economic policy, tax forecasts and limits government spending.
Following political and legal public disputes that threatened to derail the government of national unity, the National Treasury was sent back to the drawing board.
Following negotiations with the DA and others, the new Budget doesn’t include a VAT hike. Instead, Godongwana introduced a fuel levy that had been unchanged since the pandemic to bring in R4 billion in additional government revenue.
Other changes included adding spending reviews to the budget process, while less money was allocated for education and health.
Here are some of the big changes included in the final Budget:
Spending review
Budget 3.0 includes firm commitments to introduce a spending review as part of the Budget process, which is something the ANC resisted in the past.
The spending review, which is expected to be created in partnership with the Presidency as part of Operation Vulindlela, will aim to reduce spending on low-priority and ineffective government programmes and introduce greater efficiency for procurement and infrastructure management.
Treasury’s Government Technical Advisory Centre has done more than 200 spending reviews in the past; however, none has been fully implemented. Previous spending reviews from Treasury have identified R37.5 billion in savings from oversight changes and scrapping programmes.
The spending review is expected to form part of the new medium-term expenditure guidelines.
However, the DA’s demand for a fiscal rule — which would set a limit on the amount of debt the government can take on to cover its expenses — has not been accepted.
Tax changes
While in the first Budget there was some relief for individual taxpayers, Budget 3.0 offers no such help: Salary earners will be hit by bracket creep.
Bracket creep is when tax brackets are not adjusted for inflation. This means that if you get an increase, you may end up in a higher tax bracket and therefore pay more income tax.
Medical credits have also not been adjusted for inflation.
Government expects to earn an extra R16.7 billion from these unchanged tax brackets and medical credits. In addition, above-inflation increases in sin taxes (booze and cigarettes), will bring in another R1.3 billion.
From 4 June, the fuel levy increased by 16c a litre for petrol and 15c for diesel. Luckily, weaker oil prices and a stronger rand have managed to neutralise this hike this month, with fuel prices still cheaper than a month ago.
The proposed VAT hike falls away, as does plans to expand the list of zero-rated food items.
Cuts in govt spending
Treasury cut R69 billion in additional allocations (from the initial Budget) to government spending programmes for health, education, Home Affairs, and the Passenger Rail Agency of South Africa (Prasa).
Home Affairs was expected to receive R3.2 billion in additional funding over the next three years for its digitisation projects — but this has been cut to below R2 billion.
Prasa was initially allocated R19.2 billion over three years, but this was cut to R12.3 billion, and will mean less money for signalling equipment investments.
However, other allocations — to provinces and municipalities, as well as government departments — remained unchanged in the third iteration of the Budget. Treasury also said that no job cuts were expected in the civil service.
SARS gets more money
Increased allocations to SARS to improve tax collections — as proposed in the second Budget — remained in place for Budget 3.0.
In total, the revenue service is expected to receive R7.5 billion over the medium term, with R1 billion spent during the current tax year to employ an additional 1 700 debt collectors.
Godongwana said that no additional tax hikes would be introduced in the next Budget, if the revenue service could collect R20 billion to R50 billion in outstanding taxes by 2026.
Last year, SARS collected R95 billion in tax debt, and during a press briefing, SARS Commissioner Edward Kieswetter said he was confident that this figure would be increased to R120 billion this tax year. SARS also has just over R400 billion of undisputed debt in its current debt book and just over R100 billion of debt currently under dispute.
Uglier numbers
The loss of the proposed VAT hike and largely unchanged spending mean the outlook for government debt will worsen.
This means the government will spend 22 cents in each rand of tax income on debt servicing costs, with Treasury borrowing R1.2 billion a day to fund the cost.
Given that economic growth will also be weaker than expected, Treasury expects that government debt as a percentage of the GDP will now peak at 77.4% this financial year — from a previous forecast of 76.2% in the Budget tabled in March.
While it looks like government is losing its war against the rise in public debt, Godongwana said that the debt-to-GDP ratio was always expected to peak this year and decrease in the medium term. The finance minister also said that there was a wider political consensus among Cabinet members that debt had become a problem.
However, Treasury expects to make some progress. The primary budget surplus (which is revenue minus expenditure before borrowing), is forecast to grow over two years, reaching 0.8% in 2025/26, 1.7% in 2026/27 and 2.1% in 2027/28.
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