To do great things is difficult
2017/18 South African National Budget Expectations
With a mandate few leaders would have the courage to take on, all eyes will be on Minister of Finance Pravin Gordhan as he presents his second Budget Speech (since his re-appointment) for 2017/18 on 22 February 2017.
Possibly no previous Minister of Finance has had to walk a tightrope like Minister Gordhan will have to. His legacy, dotted with examples of his ‘no nonsense’ approach, appeals to an electorate so badly in need of hope and has earned him a following – nay, a fan club – that crosses the divide of race, gender and age.
As countless commentators have noted, he will take the podium against the backdrop of the International Monetary Fund’s projection of a growth rate of just 0.8% for South Africa (the South African Reserve Bank Monetary Policy Committee expects the growth rate to be higher at 1.1% whereas South African economists put this in the ballpark of 1% - still below the 1.7% per the 2016 Budget which was amended to 1.3% per the Medium Term Budget Statement (MTBS)), the ongoing country-wide drought, an ongoing commodity crisis, rising inflation and the consequential rise in basic food prices, a highly volatile Rand, a rising tax: GDP ratio (from 24.9% to 26.2% - the highest in 6 years) low or non-existent savings, foreign capital outflows and an upward trajectory in the Government wage bill that shows no signs of abating. And the list goes on.
Globally, rating agents continue to monitor Minister Gordhan’s words and actions closely – ‘junk’ status has never been more possible, despite the successful efforts to stave this off in 2016.In a near ‘perfect storm’ scenario that we find ourselves in, it is perhaps the perfect time to launch reform and tax reform is one sure way to stimulate the economy.
The MTBS projected that the fiscus would collect R23 billion less revenue than the February 2016 estimate and projected that the 2017/18 Budget would need to raise additional tax revenue by about R28 billion (this after the expenditure ceiling was reduced by R10 billion). In other words, that tax hikes across the spectrum of taxes is a must. The challenge to Minister Gordhan, however, is generating taxes without penalising growth or exacerbating inequality and stifling growth.
Some of the additional revenue generation options on the cards are:
A Surcharge Tax on Wealthy Individuals and all Companies
In addition to an increase in the marginal rate of tax for individuals lifted to the late 80’s level of 45% (from the current 41%), which could yield a further R3.5bn in revenue, it is also conceivable that a special levy or surcharge may be applied to individuals with earnings above a set threshold. This is also likely to apply to companies based on turnover as a means to collect some tax from companies when profits are non-existent. There is little scope to increase the proportion of capital gains subject to tax (currently 40% for individuals and 80% for companies and trusts). Incidentally, the Africa average for individuals tax rates hovers around 33.3% (which compares with the global average of 33.2%).
Wealth taxes: R3bn - R5bn
The Davis Tax Commission (DTC) has made several recommendations to restructure tax policy around trusts, estate duty and donations between spouses. The aim is to increase tax collection on inter-generational wealth transfers. These taxes could increase tax revenue between R3bn – R5bn per annum.
Value Added Tax (VAT): R15bn
According to the Budget Review 2016 South Africa’s VAT rate is lower than most other jurisdictions (in the ballpark of 20%). On the basis of research done by the DTC, an increase of VAT from 14% to 15% (more aligned to the global average of 15.64% and Africa average of 15.25%) is likely to add R15bn to revenue. This would however have the consequential impact of a reduction of 0.2% to 0.4% on GDP as well as an increase in inflation.
Sugar tax: R11bn
Although preliminary research suggests that around R11bn could be raised through taxing sugar products, this figure is debatable as there are many variables yet to be finalized.
Fiscal drag: R13.1bn
One way to increase tax revenue without actually increasing the tax rates is to do nothing – in other words, if the tax tables are not amended to adjust for inflationary wage increases, it is possible that an additional R13.1bn could be collected. (In 2016, only partial relief was granted for fiscal drag resulting in a net tax increase of R7.6bn.) The less relief provided for fiscal drag, the higher the contribution to additional revenue.
Fuel Levies and Other ‘Sin’ Taxes: R9bn
Above inflation increases to the fuel levy and other ‘sin’ taxes, could raise a further R9bn.
Foreign investments: possibly R10 billion, at a minimum
The last amnesty in 2003 yielded R48bn and also increased the taxable asset base. The current special voluntary disclosure programme, which aims to bring undisclosed foreign investments held by South Africans into the tax net, could generate significant tax revenue although the quantum is not known clear and will only be quantified when the programme expires in June 2017.
The current rate of 28% is unlikely to be increased, given the Africa average of 27.46% and global average of 23.6%. But companies can expect far more vigorous enforcement, driven by a focus on Base Erosion and Profit Shifting and the widening tax gap (which is the difference between what we ought to be collecting and what we are actually collecting). The perception is that multi-national entities exploit loopholes in tax rules in order to shift profits to jurisdictions where taxes are lower.
Other proposed taxes being Carbon tax and other environmentally related taxes are also a potential source of revenue collections in 2018, however these are expected to be ring –fenced and used to fund other environmentally friendly initiatives, except to the extent that it replaces existing taxes (such as the electricity levy). It would be interesting to see whether Carbon Tax will be delayed further into the future.
Given increased pressures on the fiscus, the Minister announced in his MTBS that all Government incentives are under review. The review is intended to assess performance, determine value for money, and analyse how the system as a whole supports the economy and job creation. As the Minister has indicated that the review is expected to be completed by October 2017 we expect to see little movement in the budget around incentives.
Small and Medium Enterprise
Growth in the small business sector has always been seen as a means to reducing unemployment.
The Minister’s proposed initiatives include a R1.5 billion fund to support small firms with the ability to scale up and create jobs, and a private-sector programme to create 1 million internships over a three-year period, focused on improving the job-readiness of young work seekers. To complement these efforts, Government will seek to strengthen its agencies that support small business. The expectation is that the Budget would provide more detail in this respect.
Operation Phakisa (led by the Department of Environmental Affairs), an initiative that is expected to unlock the economic potential of South Africa’s oceans – referred to as the ‘Ocean Economy’ (backed by the Government of Norway) - is prided as one of Government’s key initiatives to drive job creation. It is anticipated that the Ocean Economy could treble its contribution to GDP (from R54m to R177m) and the number of jobs (from 316 000 to 1million). Plans to leverage off these opportunities remain to be seen. The MTBS highlighted that public and private investment totalling R17 billion has been targeted towards “oceans economy” initiatives over the past two years, creating about 5 000 jobs. Investments support shipbuilding and training of marine engineers and artisans.
And if taxpayers are expecting tax hikes, we are also expecting spending efficiencies on the part of the Government by avoiding wasteful expenditure, a ‘zero tolerance’ approach to corruption in the public sector, a more efficient municipal rates system to collect revenues from property and an overall culture of ‘thriftiness’. It is true to say that Minister Gordhan will be judged on how and where tax collections are spent. Transparency is key.