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South Africa’s weak economy can be lifted by a strong savings culture, says Old Mutual Wealth

23 October 2015 Izak Odendaal, Old Mutual Wealth
Izak Odendaal, Old Mutual Wealth Investment Specialist.

Izak Odendaal, Old Mutual Wealth Investment Specialist.

The medium term budget announced on Wednesday reflects National Treasury's ongoing commitment to supporting economic growth and social development. The priorities are education and skills, health services, social protection, infrastructure and job creation.

Finance Minister Nhlanhla Nene opened his address by referring to the challenging global and domestic economic circumstances, and stressed that if SA does not achieve growth, revenue will not increase and if revenue does not increase, expenditure cannot be expanded. With a downgraded projection of South Africa's growth to about 1.5% this year and 1.7% for 2016, and tax revenue revised down by R7.6 billion, it is clear that this budget will most certainly have consequences for all South Africans, and that tax reforms may follow.

Izak Odendaal, Old Mutual Wealth Investment Specialist, comments: ‘The medium term budget is not usually a forum for tax announcements, but a number of comments and hints in the Minister's speech suggest some tax increases are likely.’

Although the Minister detailed required expenditure cuts and cost containment measures, he indicated four areas (over and above sin taxes) that Treasury could focus on to increase tax revenue:

- VAT
- estate duties
- wealth tax
- dividend-withholding tax

Odendaal says Old Mutual Wealth does not believe a new wealth tax will be introduced yet, although the existing wealth tax could be targeted. ‘Dividend-withholding tax, which could bring in an extra R7 billion if the rate is increased from 15% to 20%, is a more likely new source of revenue,’ he says.

Although Capital Gains Tax could bring in an extra R3.5 billion if the effective rate is increased from 13% to 20%, any announcement on this is unlikely before February 2016.
Other revenue may be generated through small business taxation, mining taxation and addressing tax avoidance through profit shifting and misusing transfer pricing between various businesses within companies.

On the plus side, Minister Nene drew attention to the progress that is being made through the new tax free savings products. ‘These are saving avenues that more South Africans need to consider as the lack of taxation on interest and capital gains could be significant,’ says Odendaal.

He adds: ‘Although the economy is set to continue its slow growth and volatile projectile, ordinary South Africans can help improve the economy and their own future financial wellbeing by developing a savings culture.’

Important benefits of high levels of national savings are a reduced dependency on fickle foreign investments, and a lower trade deficit.

Significantly, financial services companies are able to redeploy the savings of ordinary South Africans into investments that not only earn sustainable above average returns, but support socio-economic development through responsible investments in infrastructure, renewable energy, education, affordable housing and agriculture.

‘By increasing their savings and investments, ordinary South Africans can play a role in accelerating growth and strengthening the economy,’ says Odendaal.

 

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