2012 Budget Projections

Geraldine Macpherson, Senior Legal Specialist at Liberty Retail SA

Rowan Burger: Head of investments strategy from Liberty Retail SA

Tendani Mantshimuli, Consumer Economist at Liberty Retail SA

Last October Finance minister Pravin Gordhan announced the Medium Term Budget Policy Statement against the backdrop of a somewhat optimistic economic outlook. The South Africa’s GDP was expected to increase by 3.1% for 2011 and 3.4% for 2012. The projec

Infrastructure expenditure

Most of the investment expenditure we’ve seen in SA during and post recession has been driven by general government (which includes public corporations) infrastructure expenditure first for world cup related projects then major projects like the Gauteng freeway upgrade and the Transnet pipeline upgrade. Private companies have been sitting on the sidelines with substantial cash reserves; they are not spending on capital projects partly due to uncertainty of the solidness of the economic recovery and policy uncertainty, particularly in the mining sector. During the State of the Nation Address the president mentioned a sizable infrastructure project for Transnet expected to take place over the next seven years. This is very good news for the economy but the major question remains the funding. True, Transnet can raise funding in the open market but other government infrastructure projects have to be funded from revenue or borrowing. Since revenue will be constrained by the weak economic performance there will be a drawback on other government infrastructure expenditure which will have a negative impact on economic growth. Given that two rating agencies have put SA’s rating on a negative outlook, government will be circumspect on adding to government debt through borrowing to fund capital expenditure. It will be very tricky for the minister to have some stimulus for the economy through capital expenditure without widening the deficit to levels that will make investors nervous about our ability to repay.

Current expenditure

As always government will be allocating expenditure to various departments in order to meet its service delivery commitments. One of the largest expenditure items for government is its salary bill. The minister already warned last year that it was around 40% of non-interest government expenditure. We know part of the employment created in the formal sector over 2011 came from the public sector; no doubt this has increased the public sector salary bill. Government departments need to bring in some efficiency in terms of the way they do business because having more people does not necessarily lead to an increase in output.

Over the past few years the number of social grant recipients has increased substantially and currently sits at about three times the number of tax payers who form SA’s tax base. This has gone a long way toward easing poverty but the sustainability of the program depends on government revenue streams and how well the economy is doing. Government has committed to a phased increase of the number of recipients; with the current economic outlook this can only happen at the expense of a smaller annual increase on the monetary value of the grant.

Tax relief

It’s difficult to see a meaningful allocation towards personal income tax relief with the constraint of lower tax revenue; given the other expenditures that government has to undertake the only possibility is lowering the tax burden of lower and middle income groups with the higher income groups just being compensated for fiscal drag.

Policy changes

It’s unlikely that there will be major policy announcements; any definitive statement on nationalisation will probably only be made at the ANC policy conference later in the year. Hopefully the minister will provide clarity on the funding model of the National House Insurance.

Budget speech 2012:

By: Geraldine Macpherson, Senior Legal Specialist at Liberty Retail SA

The budget speech which is to be presented on 22 February is a much anticipated event, not least of all from a financial planning perspective. We eagerly await the potential planning opportunities it may present and secretly dread any changes which may impact negatively or in any way dis-incentivise saving, even though this would clearly never be the stated intent.

There are a number of issues that we hope, and would like to see, addressed in the 2012 budget:

Abolition of estate duty

There has been much talk of this, both in terms of the last 2 budget speeches, and also in the professional circles dealing with estate planning. While the abolition of estate duty would obviously be welcomed, it would be very interesting to see what would happen to donations tax – one would assume that if estate duty goes, so too would donations tax. Also, the question then arises whether National Treasury would increase the effective rate of capital gains tax (CGT) at death, possibly to a 50% inclusion, and whether it would require a re-write of the current CGT legislation, to close any loop holes created by the abolition of estate duty.

Abolition of exchange control

There have been murmurings about this with regards to emigration – lifting the caps entirely when it comes to those permanently exiting South Africa. In addition, the individual limits have been substantially increased to R4 million per annum, with residents being able to remit R1 million without a tax clearance – so really, the next step seems to be an obvious one. This would broaden the financial planning opportunities available to a very small section of the South African community – those who can afford to invest more that R4million per annum offshore (and who want to!)

Confirmation on the tax deductibility of contributions to retirement annuities and pension funds

Reference was made to this in last year’s budget, with a maximum of 22.5% deduction across all funds being proposed, limited to R200 000. While this did not come into effect this year, it did create a degree of doubt in taxpayers’ minds as to how much one should be contributing, if the deduction is driving the decision. This has resulted in a reluctance in individual taxpayers to contribute more than a total of R200 000 across all funds on a recurring premium basis, with tax payers electing to rather make ad hoc contributions into existing RAs (hoping that when the time comes they actually still have the cash in hand). Clarity would lend a degree of stability to the financial planning process and could see a number of taxpayers benefitting from a higher deduction than what they currently enjoy, and thus drive greater saving. Of course, we hope that the 22.5% or the R200 000 (or both) are lifted, so that high income earners also benefit from the new regime.

Approved benefits – confirmation of the status quo

Last year it was proposed to also levy a fringe benefits tax on employer paid approved risk benefits. We hope that National Treasury will confirm that this is no longer on the agenda, in order to further add impetus to the drive to get South African’s to save more towards their retirement - to be financially secure and not dependent on the state at that point in time.

Greater incentives towards youth employment and job creation

We hope that employer’s will be incentivised to not only employ the youth, but to partner in up-skilling them and also be incentivised to create further job opportunities. This would tie in with the tone set in last year’s budget by the minister.

Our wish list could go on forever, but if just a few of these issues are addressed we would be well satisfied.

By: Rowan Burger: Head of investments strategy from Liberty Retail SA

We do not expect any formal changes to the taxation system on retirement savings. The reasons for this are; the complications in dealing with the implementation of a national social security system and, the unintended consequences this may create. The one change that may be introduced if there is a push to balance the budget is the introduction of a maximum level above which no further tax deductions can be claimed for retirement savings purposes (floated in the last budget). While as industry we understand the policy imperative and the use of taxation as a tool for redistributive purposes, we would really like to see the savings there redirected to a co-contribution to incentivise non taxpayers (low earners) to save.

A key policy challenge is the lack of adequate retirement benefits for all citizens. The key reason for this is that people are allowed to cash in their employer retirement savings when changing jobs and getting divorced. The introduction of compulsory preservation of retirement savings until retirement would ensure that fewer people become a burden on the state in old age. This is obviously a highly contentious issue, as South Africans have low levels of savings and are often reliant on these long-term savings to meet urgent short-term financial needs. We therefore expect a formal announcement of the intention to introduce this in a way not to disrupt existing savings patterns and ensure the government’s incentives given for long term savings bear fruit.

The key announcement we are expecting following the medium-term budget outlook from October 2011 would be a formal announcement of government’s intended national social security fund. In all likelihood this will be deferred and left to the Minister of Social Development. This is a clear signal of the move away from fiscal conservatism to a more populist approach which could have a significant impact on the country’s credit rating. So what is not going to be said in this aspect of the budget is just as important. I will be watching to see to what extent there is unity within government in terms of the more populist proposals.

With inflation expected to be around 6% for the year, social grants should broadly increase in line with this number. It is common for grant increases to be used as a political tool. Given a tight budget there may be an amount held back to give a bigger increase for next year’s election. Alternatively, many would argue that South Africa effectively has its election this year.