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Mid-term budget speech 2017 lacked concrete steps

26 October 2017 Mazars

Treasury has not given a clear enough indication on how it intends to address its revenue shortfall, leaving experts to speculate that the majority of revenue will be financed by taking on additional debt.

This according to Mike Teuchert, National Head of Taxation at Mazars, following the mid-term budget speech (MTBS), delivered by Minister of Finance, Malusi Gigaba on Wednesday.

In his speech, the Minister revealed that Treasury’s revenue shortfall currently stands at R50.8 billion, amounting to 4.3% of South Africa’s gross domestic product (GDP), around 38% higher than expected.

“This is a concerning prospect. Attempting to close the growing shortfall with increasing amounts of debt each year, just puts the country in a bigger and bigger spiral. Treasury also estimates that repaying South Africa’s debt will amount to 15% of GDP. We would like to know whether this estimate is only taking South Africa’s current credit rating into account, or whether the Minister is also making provision for future downgrades,” Teuchert says.

“The Minister acknowledged that Eskom is now operating at excess capacity, which was a very interesting point to note,” he adds.

“This creates somewhat of a contradiction, since Minister Gigaba had previously said that the construction of nuclear power in South Africa would proceed at a rate that the country could afford. Yet by admitting that Eskom is at excess capacity, it raises questions over whether a nuclear build would still be necessary,” Teuchert continues.

In addition to more debt, Teuchert speculates that income tax will once again bear the brunt of the tax burden. “Income taxes will almost certainly increase next year, and the top income brackets will likely see the highest increases once again. Treasury has already noted a slippage in income tax compliance, and there is definitely an increased risk that the revenue gained from income taxes will decrease, either a s a result of the country’s top earners emigrating, or an increase in tax avoidance.”

Tertius Troost, Tax Consultant at Mazars comments that Treasury’s plans to rescue South African Airways (SAA) could also be problematic. “The Minister makes mention of selling around R4.95 billion Telkom shares to fund SAA, which we do not believe to be prudent. Treasury would in effect be getting rid of a good asset to finance a bad one.”

Looking at the possible tax changes that South Africa may see next year, Troost notes that raising VAT is becoming an increasingly difficult option. “Even though it had the potential to bring in the most revenue last year, increasing VAT is a very unpopular move. We believe that it will be even harder for Treasury to motivate for a VAT increase in 2018, as we get closer and closer to the next general election.”

David French, Tax Consulting Director at Mazars points to the Minister’s statement that the shortfall will in part be funded by South Africa’s contingency reserve. “This could be a smart move, but it will mean that if South Africa is faced with a major catastrophe, there may not be enough available to help the country recover. Then again, perhaps Treasury considers the massive revenue gap to be a catastrophe.”

It has been estimated that South Africa’s economy will grow 0.7% by the end of this year, and 1.2 percent in 2018. This is significantly lower than the 1.3% growth that was forecast during the 2017 Budget Speech in February. French notes that this estimate is significantly more realistic than the statements made at the start of this year.

“One thing that was ironic for us, was the fact that the Minister indicated his intention to increase investor confidence. At the same time, his speech very clearly lacked any concrete resolutions relating to how Treasury will increase revenue, in effect damaging investor confidence even further”.

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