Budget 24 preview: tough choices or an election-friendly budget?

When finance minister Enoch Godongwana delivers his budget speech on 21 February, will he make the tough choices, increase taxes and announce belt-tightening measures, or will it be an election-friendly budget designed to keep voters choosing the ruling party?

In his mid-term budget (MTBPS) Godongwana revealed a significant shortfall in government revenue, projecting a loss of nearly R57 billion for the current tax year and R54 billion for 2024/2025.

Faced with financial strain, he warned South Africans to brace for potential tax hikes and a decrease in government spending in the upcoming 2024/2025 tax year, Yolandi Esterhuizen, a registered tax practitioner and director of global compliance: product management at Sage AME, says.

Bazil Marema, also a registered tax practitioner and senior compliance specialist at Sage AME, says National Treasury is confronted by the formidable challenge of raising tax revenue while keeping the electorate satisfied in an election year.

“The Budget Speech in February is usually a balancing act, but this year, in particular will require an especially delicate touch.”

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Esterhuizen and Marema and their colleague, Motumi Tsoeute, senior compliance specialist, say they will keep an eye out for these 10 key aspects:

No PAYE increases

South Africans are grappling with inflation and increasing energy and food costs as well as higher interest rates. Although government may be reluctant to directly increase income tax, especially for low and middle-income earners, we can anticipate a minor tax bracket creep to cater for inflation, they say.

Delays for National Health Insurance (NHI)

“We can expect a potential delay in the NHI implementation, coupled with uncertainty about its funding, possibly due to the hesitance to introduce new payroll taxes amid taxpayer struggles and prevent possible cancellations by medical aid members and further burdening an already strained public health system.”

Fuel levy increases

For the past two years, government maintained the fuel levy at a consistent level to support individuals and businesses grappling with higher petrol and diesel prices, but this year, they say, we will likely see an increase in line with inflation.

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Diesel refunds for smaller generators

In the 2023/2024 budget, government extended the Road Accident Fund levy refund for diesel used in manufacturing for food producers, effective from 1 April 2023 for two years to mitigate the impact of power outages on food prices.

Some experts suggest expanding this diesel refund to businesses using generators to produce electricity as this will benefit small and medium businesses, particularly during load shedding. Whether the government will consider such a measure, given the need to increase revenues, remains uncertain.

Solar energy tax credits

The 2023/2024 tax year provided tax incentives for households adopting solar power solutions. Whether government will extend this incentive remains to be seen with ongoing load shedding.

Electricity minister Kgosientsho Ramokgopa supports the tax incentive continuation and proposes expanding it to include inverters and batteries. The budget speech will reveal whether his suggestion is embraced.

Catering for remote workers

The Covid-19-induced shift to remote and hybrid work transformed business operations. National Treasury is actively updating tax laws and might adjust the tax treatment of home office and travel expenses in the upcoming tax years to accommodate a digital and global workforce, they say.

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Bringing digital nomads into the tax net

Many South Africans now work remotely for foreign employers, raising concerns for National Treasury and Sars about potential tax evasion. The 2023 Tax Administration Law Amendment Bill proposes that all employers, including those abroad who conduct business through a permanent establishment in South Africa, withhold PAYE for South African employees and remit it to Sars monthly.

To address potential challenges, the minister may provide insights into balancing tax compliance with the need to foster new job opportunities.

Focus on tax collection from South Africans working abroad

The 2023 Taxation Laws Amendment Bill proposes that tax deductions for employer contributions towards retirement funds be disallowed if the employer contribution is not included in the taxable income of the employee.

An example of this is when an employee works abroad and meets certain conditions, whereby the remuneration, including the employer contribution, may be exempt from tax.

“We anticipate similar measures to broaden the tax base for revenue collection to be proposed.”

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VAT likely to remain the same

Given the state of our economy and the disproportionate impact of a VAT increase on poorer communities, they think it is unlikely that the VAT rate will change.

Sars has already announced plans to digitise the VAT process and efforts to intensify collection will serve as a more politically accepted alternative to a rate increase.

Corporate income tax likely to be steady

“Although it would be ideal for the minister to consider a further reduction in corporate income tax, we believe he will maintain the corporate income tax rate at its current level for the fiscal year 2024/5.”

ALSO READ: Mixed reactions from SA business sector over Godongwana’s 2023 budget

Bold steps needed on tech and SMB sustainability

In the next budget, they hope to see bold action from government to reignite economic growth and job creation.

“We would welcome ambitious steps to support SMBs in addressing the power crisis and reducing the carbon impact of their operations by using more renewable power.”

Esterhuizen, Marema and Tsoeute say it is also essential for government to recognise the rapid impact of artificial intelligence, electric vehicles and hybrid work on our world.

“We look forward to hearing about policies that position South Africa as a leader in the digital economy and how they plan to enable SMBs to accelerate their digital transformation.”

Bianca Botes, Citadel Global director and treasury partner, says as this is an election year, we are likely to see an election-friendly budget speech rather than the prioritisation of fiscal certainty needed to build investor confidence and implementation plans required to drive economic growth.

“The challenges in South Africa are not only numerous but also complex, ranging from collapsing state-owned enterprises, such as Transnet and Eskom, a pressing debt burden, political and policy uncertainty to South Africa’s geopolitical positioning, which can all contribute to volatile market conditions.”

Jee-A Van der Linde, senior economist at Oxford Economics Africa expects further fiscal slippage as government scrambles to rein in spending amid inadequate revenue growth.