Manuel ready for budget number 12

Later this afternoon finance minister Trevor Manuel will preside over his twelfth budget presentation as millions of taxpayers clamour to see what’s in it for them. If we listen to the experts then his speech will probably offer little to the average citizen – focussing instead on providing further relief to the poorest of the poor. And this means the budget surplus achieved in the last budget period will probably be a one off!

No major tax reform this year

Those hoping for radical changes to the tax regime are certain to be disappointed. Analysts are on record this will most likely be a conservative budget, focusing on further poverty alleviation. Eskom and other infrastructure issues will probably feature prominently in the budget. Government will have to find some way to ensure that Eskom is able to recapitalise to meet electricity demands in the next decade. Estimates are the state energy producer needs in the region of R50bn from government to tide it over. Some say that Manuel will announce a government ‘rescue’ package by way of loans and guarantees.

Any hope for a cut in the corporate tax rate from 29% to 28% has evaporated, and the consensus is this will probably not happen. Instead, analysts expect the minister to clarify the abolishment of the secondary tax on companies (STC). This was promised during his last budget speech; but is still on hold pending the finalisation of double taxation agreements with a number of countries. According to Deloitte these include Australia, the UK and Ireland among others. Because negotiations around these agreements take time it is unlikely the intended withholding tax on dividends will replace STC in the coming budget period.

Scant relief for individuals

We’ve looked at budget predictions from a ream of tax practitioners and economists who all agree on one thing. There is not going to be much in the way of tax relief for private taxpayers. All we can bank on is that Manuel will make small adjustments to personal income tax brackets to account for bracket creep – the effect of inflation on taxpayers. “Personal income tax relief is likely to be limited. The top marginal tax rate should remain unchanged at 40 percent. However, there will be the normal adjustments to the tax thresholds to compensate for the effects of inflation. Some tax brackets are likely to be adjusted more than others, with lower and middle-income earners receiving slightly more relief,” according to Nedbank.

And taxpayers are likely to pay more for the so-called ‘sin’ taxes. The increase in taxes on alcohol and tobacco is a given in almost every budget. Government believes the impact of these taxes is of double benefit – swelling revenue on one hand, while reducing long-term healthcare costs by ‘encouraging’ citizens to smoke and drink less. Something else South Africans need to be encouraged to do is save. We hope Manuel addresses this need, possibly by providing more detail on the workings of government’s proposed social security reform programme.

Value Added Tax will remain unchanged at 14%. There have been suggestions that Manuel could raise the basic VAT rate and exclude more goods. But despite arguments to the contrary the perception is that VAT is a tax on the poor and as such Manuel will be unlikely to make any changes just a few months before the country’s next general election.

A social budget

With elections looming in 2009 pundits expect the minister to deliver a social budget with larger amounts allocated to education, health care and safety and security. But with one in four South African’s benefiting from some form of social grant it is difficult to imagine how Manuel can increase grant coverage in a country which is already regarded by many as a welfare state. Suggestions include upping the age of the child grant recipients from 14 to 18 years or creating a basic income grant. And billions will have to be found to accommodate a recent decision to lower the age for men to receive pensions from 65 to 60.

And that raises the question: How much money does Manuel have to play with? Johan Els, economist at Old Mutual Investment Group SA recently told Fin24 that Manuel could have as much as R25bn. This amount is achieved by adding the expected revenue overshoot (R4.1bn), additional taxes (R3bn), the budget surplus (R16bn) and a deficit for the 2008/2009 year (R2bn). Manuel will be under pressure not to budget for a surplus this year, as it is seen as inappropriate given the country’s socio-economic situation.

Others have warned that the minister should not underestimate the impact on revenues in the coming year due to Eskom’s performance woes. Efficient Group economist, Dawie Roodt calculated that a fall in GDP from 4.6% to 3% could remove as much as R5.9bn from the table. Nedbank economists agree (in part) with this view. They say that a slowdown in growth over the next three years will significantly impact revenue growth. “This will leave the treasury with little leeway to cut taxes. The government’s need to respond to the electricity crisis and meet longer-term objectives to reduce poverty will also limit the extent to which taxes can be reduced,” it said. Should this scenario play out, Manuel could have a lot less to work with than he thinks.

Editor’s thoughts:
A few days before Manuel’s budget speech, the People’s Budget Coalition (a group consisting of Cosatu, the SA National NGO Coalition and the SA Council of Churches) called for the establishment of a basic income grant. This grant would be paid to unemployed South Africans by way of a system similar to the UK dole. Do you think an income grant makes sense given a quarter of South Africa’s population already receives some form of social grant? Send your comments to gareth@fanews.co.za or simply add them below.