Another year, another budget

Gareth Stokes, FAnews Online Editor

Budget speech 2010 has come and gone. On Wednesday, 17 February 2010, Finance Minister Pravin Gordhan presented his 30-page prepared speech to Parliament. Gordhan’s opening paragraphs suggested his budget would be an upbeat one. He acknowledged the “inimi

This budget was the first in 14-years not to be presented by former Finance Minister, Trevor Manuel. Although the disciplined fiscal policy remains intact, Gordhan admitted that certain aspects of governance and leadership would have to improve. “The first message of this budget is that all of us, whether you are in Sandton or Upington, in Lusikisiki or Marabastad, we must all be prepared to do things differently!” One of the challenges will to be increase government expenditure on essential services under trying economic conditions. The domestic economy contracted 1.8% in 2009 – mining output fell 7% and manufacturing a massive 12% – with the result approximately 900 000 jobs were lost. Growth for 2010 is pencilled in at 2.3% rising to 3.6% for 2012.

Strict fiscal discipline required

A great deal of pre-budget debate centred on debt and deficits, with concerns over government’s ability to borrow additional funds. The 7.3% budget deficit recorded in the 2009/10 tax year “equals the worst budget deficit South Africa has recorded since at least 1961,” says Kevin Lings, economist at StanLib. Economists will welcome the Minister’s focus on restoring fiscal deficit by budgeting for a deficit of 6.2% of GDP for 2010/11 and an even more respectable 4.1% by 2012/2013. Lings is less impressed with government debt as a percentage of GDP, expected to soar from 32.5% in 2008/09 to 37.1% in 2010/11. “This is the largest debt level, as a ratio of GDP, South Africa has had since 2001/2002,” he said. Are you concerned? You should be. Servicing this debt will require interest payments of around R71.4bn in the next tax year?

Social spending on the up

Government has R907bn to ‘burn’ in 2010/11 – and will spend R2.9 trillion over the next three years. “Real growth in public spending over the next three years is about two percent per year. This is lower than the rapid growth in public spending over the previous three years, but it still provides for substantial increases in our key spending programmes,” said Gordhan. Where will this money go?

This year’s budget priorities include improving the quality of basic education, making communities safer, fostering rural development, creating jobs (especially for the youth) and investing in local government and human settlements. We doubt there will be too many complaints if government successfully addresses the shortcomings in these key areas. As expected the bulk of this expenditure goes to Social Services (R497.2bn), to include education (R165.1bn), social protection – also known as welfare (R128.4bn), health (R104.6bn) and housing and community amenities (R93.2bn).

Public order and safety gets R85.6bn, split between police services (R56.5bn), prisons (R16.3bn) and law courts (R12.9bn). And there was some sobering news for state employees. Gordhan advised: “Now that a major revision to public service remuneration is behind us, it will be necessary to moderate salary increases going forward.”

Tax for the man in the street

Revenue collections dried up in 2009/10 as a result of this economic deterioration. “We now expect to raise R69bn less in tax this year than we budgeted,” said Gordhan. Total revenue collection for the 2009/10 year will actually come in some R32bn less than in the past fiscal year! The R22bn decline in Value-added tax illustrates the extent of the slowdown in the consumption sector of the local economy, while the R30bn slide in corporate income points to deteriorating profits in all sectors. Treasury expects 2010/11 to present further revenue collection challenges.

How will they plug the gap? There are only two options available to them: raise taxes or reduce expenditures. “The preferred method of achieving higher revenue is through base-broadening, closing loopholes and improving tax compliance,” said Gordhan. The considerable financial stress of households meant there would no increase in the overall tax burden this year. Income tax relief for individuals was a modest R6.5bn. “The largest tax change was an adjustment to the thresholds and tax brackets applicable to individual income tax. This is really to alleviate some of the effects of inflation, or what is referred to as fiscal drag,” noted Lings.

Specific changes include:

· An increase in the monthly monetary caps for deductible medical scheme contributions,

· Raising the annual tax-free interest income from R21 000 to R22 300 for individuals under 65, and from R30 000 to R32 000 for the 65s and over,

· The introduction of an ad valorem carbon emissions tax on new cars from 1 September 2010,

· Yet another hike in the fuel levy. The 25.5 cents a litre will be used to fund a new multi-product pipeline between Durban and Gauteng (7.5c/litre) and an increase in the road accident fund levy (8.5c),

· Sin taxes such as cigarettes and alcohol were increased again, and taxpayers warned that the taxation of these goods would be reviewed going forward.

At least the minister mentioned accountability

Gordhan talked tough on corruption, fraud and tender irregularities throughout government and we hope his calls for “greater transparency and accountability” echo through the halls of parliament in coming years. There must have been plenty of public sector workers shifting uncomfortably in their seats as they listened to the address.

What does South Africa need to do over the next decade? It seems everyone agrees on the root of our problems. Gordhan observed: “One in four adults seeking work is unemployed, while almost half our young people have not found work!” He also lamented the country’s income inequality as one of the highest in the world. The solution, in our view, is to facilitate employment and improve education. If only the entire budget had focused on these key issues!

Editor’s thoughts: Another year, another budget. South Africa should be proud to have emerged from the recession in a better financial shape than many European countries. Now everyone has to do their bit to make change happen! Were you happy with the cuts in personal income tax, or do you feel the increases in fuel levies and sin taxes will eat into any ‘bracket creep’ savings? Add your comments below, or send them to gareth@fanews.co.za