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No relief in sight for consumers as Nene brings bad news

30 October 2014 Jonathan Faurie

The South African economy has been under severe pressure for a number of years. While other developing markets are achieving economic growth of close to 6%, South Africa has to be content with growth of close to 2%, possibly even 3% if all the pieces fall correctly into place.

These are some of the challenges which were highlighted by the new Minister of Finance, Nhlanhla Nene, when he announced the country’s 2014 Medium Term Budget Policy Statement (MTBPS). One of the features of the MTBPS is that South Africa needs to achieve a growth rate of close to 5.5% in order to make significant progress in job creation and poverty eradication.

In order to achieve this, the consumer is in for a rough ride over the next few years as Nene boldly proclaimed that short-term sacrifices are necessary in order to achieve long-term gains.

Asking the public for relief

One of the features of the South African economy over the past few years has been the poor performance of the country’s Gross Domestic Product (GDP). In fact, South Africa is a net importer of goods, which means that the country’s current account deficit is unreasonably high.

The poor performance of the country’s GDP means that government relies heavily on tax revenue collection in order to make any dent into this, and to kick start economic growth. However, this is also an area where government is under pressure.

Kay Walsh, Deloitte’s Executive Lead in Economics, points out that while government spending has remained with the limits of the expenditure growth ceiling put in place in 2012/13, economic growth has consistently disappointed relative to National Treasury’s forecasts which has translated into lower tax collections.

“Tax revenue collections have been revised lower by R10 billion for 2014/15 due to the underperformance of Corporate Income Tax, Customs duties, Value Added Tax (VAT) and the fuel levy. The deficit on the main budget balance is forecast to remain stubbornly high at an expected -4.8% of GDP in 2014/15, which is a slight deterioration from -4.7% forecast in February. Net debt is projected to peak at 45.9% of GDP in 2017/18 as opposed to 44% of GDP forecast previously.

Additional pressure

Izak Odendaal, Investment Analyst at Old Mutual Wealth, says there is no question that taxpayers are in for some additional squeezing in coming months.

“The Minister will have little option but to announce some bad news for taxpayers, whether it be in the Medium Term Budget, or in the February Budget Speech”, says Odendaal.

“Three tax changes appear to be on the table in the medium term. Firstly, VAT exemptions may be eliminated. Currently, a range of fresh food items are VAT free, benefiting the rich and the poor alike. The blow to poorer households from this change could potentially be offset by increased social grant payments. Increased marginal tax rates for high income earners, or another form of wealth tax, are also a possibility. This will probably be for symbolic rather than fiscal reasons, as high income earners are already stringently taxed, so there is little extra revenue Government can squeeze out of them,” saysOdendaal.

He adds that closing any remaining loopholes and tax avoidance schemes is likely to be on the cards. Particularly the practice by some companies of offshoring some of their tax liabilities.

Slow growth bad for tax revenues

“To grow its tax take, Government relies on economic growth, yet economic growth has been most disappointing,” notes Odendaal.

“At the time of the February Budget Speech, National Treasury was expecting the economy to grow by 2.7% in real terms this year, and 3.2% in 2015. However, with protracted strikes, sluggish global growth and a squeeze on household incomes, the economy has faltered this year. Currently, the International Monetary Fund (IMF) expects growth of only 1.4% this year and 2.4% in 2015, while the South African Reserve Bank’s (SARB) most recent forecasts were for 1.5% and 2.7% respectively,”says Odendaal.

He mentions that, at the time of the February Budget Speech, tax revenue was expected to increase by 8.6% compared to the previous year.

“But five months into the current fiscal year, tax revenue is BREAK only growing by 6.9% compared to the same period last year. Tax revenue projections for the following two fiscal years (9.9% and 10.3% respectively) now seem very ambitious. Meanwhile, expenditure growth is running ahead of budget, which means the budget deficit is growing, rather than shrinking, which should be raising the alarm bells,” he says.

Walsh adds that while little detail on the tax proposal has been provided at this stage, the MTBPS hints at a more progressive tax structure, suggesting the overall tax burden on wealthy individuals will be increased.

“This could either be in the form of increased tax rates for high income earners, or higher additional wealth taxes such as capital gains tax, or luxury vehicle tax. The recommendations of the Davis Tax Committee will inform the tax proposals,” she says. Tax revenue will also be enhanced by improving tax efficiency and achieving structural improvements in revenue.

Targeted increases in tax revenue are R12 billion for 2015/16, R15 billion for 2016/17 and R17 billion for 2017/18.

Is a shake-up likely?

Tax collection has always been a problem in the country and the fact that 8% of the population is funding the tax income for the whole country is unsustainable, but it is a reality that we need to come to terms with.

Government needs to widen the gap while also creating an environment that encourages enterprise development. The high level of tax on high earning individuals may be restrictive in the sense that this group is the country’s best chance at enterprise development. The high level of Business Tax is also a detrimental factor towards enterprise development as it discourages foreign direct investment.

An area that government really needs to focus on is widening the collection net when it comes to Personal Income Tax; there have been a number of suggested reforms which include raising the level of VAT. In this regime, the poor and the rich are taxed alike and government would still achieve its goal of taxing higher income earners at higher levels because they would spend more than lower income earners.

While all of these suggestions have been made by government, it is not likely that we are going to see any change in the current system as government is approaching it from the standpoint of: if it is not broken, why fix it.

Editor’s Thoughts:
While some may argue that it is unfair that the public is saddled with governments high levels of debt, it may be necessary. The viewpoint of Nene that short-term sacrifices are necessary to achieve long-term gains indicates that once Eskom’s infrastructure build programme is complete, there might be some tax relief. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Frans, 30 Oct 2014
Excellent article Jonathan. Thank you.
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Added by Wayne, 30 Oct 2014
1. Get the unions under control
2. Cut down on the excessive public service and create efficiency
3. Abolish company and personal tax but increase VAT to make up the difference on non-essential foodstuffs (companies will flock here as no tax and individuals will spend more as they will have more due to no personal income tax) - all will mean more spending, will stimulate the economy but gov. will still get the income through VAT - i.e. do the opposite to what is being proposed
4. Have a government that does not destoy business through bureaucracy - we see this in the financial services industry and it is in many others as well
5. Eliminate government corruption - this together with 2 above should eliminate the need for increased taxes by themselves I would guess
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Added by Pankie, 30 Oct 2014
Tax relief means when the total tax take of a government, including budget deficit loans (which is effectively a deferred tax), are in nominal terms lower than the previous year. Every other form of so-called "tax relieve" is robbing Peter to pay Paul.
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