Fiscal Jigsaw: Assembling the 2024/25 Budget Speech Pieces

The 2024/25 Budget Speech, presented by Minister of Finance, Enoch Godongwana, brought forth noteworthy points that impact various facets of financial planning.

In the National Treasury’s attempt to streamline and enhance the coherence of South Africa's financial framework, several crucial amendments were introduced. Here's a concise breakdown of the key changes affecting retirement funds, medical expenses, VAT, foreign exchange, and the voluntary disclosure program.

2024 Budget Highlights:

The "Two-Pot" Retirement System (Implementation date September 1, 2024): The National Treasury and SARS have unveiled revised draft legislation for the "two-pot" retirement system following the 2023 Budget Speech. The proposed changes introduce a shift from the term "pot" to "component" and outline detailed amendments for three components: vested, savings, and retirement. Key aspects include provisions for withdrawals, taxation, seed capital, and contributions. Public comments on the proposals were accepted until July 15, 2023, whilst further stakeholder engagement is planned. The communication emphasizes the importance of considering withdrawals before retirement as a last resort, urging members to prioritize preserving savings for retirement. Due to the complexity of the changes, individuals are advised to seek advice from GIB Financial Services before making any withdrawal or retirement planning decisions.

With regard to Medical Expense Deductions, taxpayers will receive deductions for monthly medical scheme contributions, with allowances ranging from R364 to R246 per dependent. Those aged 65 and above or with a disabled spouse/child can deduct 33.3% of qualifying medical expenses, while others can deduct 25%. This is capped at the amount which exceeds 7.5% of taxable income.

Deposit Insurance comes into effect 1 April 2024 and this refers to the first R100 000 of a customer’s deposits at a bank will be protected in the case of a bank failure.

How will it be realized?

Tax Adjustments: The budget proposes several tax measures, including not fully adjusting medical tax credits for inflation, marginal increases in carbon fuel levies, sin taxes, and the implementation of a global minimum corporate tax for corporates earning revenue above €750 million annually.

Economic Growth Initiatives: The government aims to boost economic growth by introducing measures such as relief for electric vehicle producers, supporting infrastructure spending through new financing models like infrastructure bonds and special purpose vehicles, and encouraging private sector partnerships in key sectors.

Expenditure Management: The budget emphasizes expenditure reductions, with proposed cuts in the medium-term budget expected to be partially reversed to facilitate wage payments to civil servants. Additionally, the government plans to allocate funds from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to address fiscal risks and reduce borrowing.

Debt Management: The government acknowledges the need for managing debt, with efforts to draw down funds from GFECRA and reduce the risk premium associated with borrowing. Plans to peak the gross debt-to-GDP ratio at 75.3% in FY25/26 and subsequently decline demonstrate a commitment to fiscal consolidation.

Structural Reforms: Structural reforms, including fiscal anchors, private sector involvement, water reforms, disaster risk financing strategies, and rationalizing government departments, are highlighted as ongoing initiatives to enhance economic resilience and growth. These measures collectively aim to balance revenue generation, expenditure control, and strategic financing to achieve the outlined fiscal goals and priorities in the budget.

In short, the South African budget for the upcoming fiscal year will be financed through a combination of strategies. The government anticipates collecting revenue through tax measures, including a global minimum corporate tax expected to yield R8 billion in FY26/27. To cover expenditure, borrowing is planned, with the gross borrowing requirement projected to decrease from R553.1 billion in FY23/24 to R428.5 billion by FY26/27. Additionally, the government aims to draw down R150 billion from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to reduce the need for borrowing, signalling an effort to manage debt levels.

The market’s mixed reactions:

The National Budget, made public on 21 February 2024, revealed a mixed market response. Initially, positive reactions were observed in fixed income and currency markets due to a narrower budget deficit ratio. This was driven by moderate tax measures and changes in funding. However, currency markets later reversed gains, reflecting concerns about fiscal sustainability. Equities slightly declined with minor tax announcements.

The Budget was in-line with market expectations with a gross tax revenue of R56.1bn for 2023/2024. This was lower than estimated in the 2023 Budget due to a decline in corporate profits and revenue from taxes on mining. This is reflective of the current economic status quo in SA.

Debt and deficit ratios appear favourable, but concerns arise about the use of Gold and Foreign Exchange Contingency Reserve Account (GFECRA) funds primarily for the wage bill. New financing models for infrastructure are planned, and spending priorities emphasize redistribution to sectors like health and education.

State entities like Eskom report losses despite tariff hikes, and Transnet receives financial support. Challenges in rebuilding fiscal reserves amid structural economic limitations are noted, and long-term risks include slow reform progress and the potential impact of financing needs on the country's credit rating.

In sum, the 2024/25 budget ensures stability in tax rates, introduces adjustments in transfer duty, and facilitates streamlined retirement fund taxation. Stakeholders are advised to align their financial strategies with these changes for optimal planning.