Tax turnaround a happy surprise
SURPRISINGLY, considering the positives, many commentators were relatively negative about this week’s Budget Speech, saying the government made no real headway in addressing the country’s biggest headache: the amount of debt the fiscus is taking on, which is set to overshoot 70% of gross domestic product in 2022/23.
But when one compares this Budget to those of previous years, it is obvious the government has made a radical about-turn – in the consumer’s favour. The government has come to the realisation it cannot get out of trouble by increasing the burden on the taxpayer.
Its priority, in the words of
Finance Minister Tito Mboweni at a press briefing on Wednesday morning, is that “it needs to get its house in order”.
So while it may remain in financial trouble for some time, and its debt may indeed rise over the medium term, for the meanwhile at least, you are not going to have to pay more out of your pocket to provide succour.
TAX HIKES NOT EFFECTIVE
This realisation at the National Treasury that the government could not increase taxes, including, as many suggested, hike VAT by a percentage point or two, was emphasised by Warren Harris, economist at the National Treasury, in a post-budget panel discussion at FNB Portside,
Cape Town, on Wednesday afternoon, hosted by the South African Institute of Tax Practitioners, Sage, and the Financial Planning Institute. He said South Africans had endured five years of increased taxes, but the revenue had not come in as expected. In other words, we were at the point at which increased tax does not equal increased revenue – demonstrated by what is known as the Laffer Curve.
So the tax relief came as a welcome surprise, and the hope is that it may give our economy the boost it needs. At the FNB session, Jackie Arendse, professor in tax at Rhodes University, said the Budget was pro-growth, “and a key aspect of that is confidence – people feeling good about things”.
Liberty consumer economist Tendani Mantshimuli told Personal
Finance she was worried the government would again resort to tax increases, and didn’t think it had the courage to go the route it went. She says the fact that, for the first time in many years, there is income tax relief, particularly for the lower end of the market, and that an expected increase in VAT did not materialise, will go a long way to boost consumer confidence.
“The increase of R3 000 on the annual tax-free savings account limit will encourage saving,” she said, “and the effective lowering of transfer duty on property (through adjusting the brackets upwards) will be a welcome boost for the property market.”
POLICY UNCERTAINTY
Sanisha Packirisamy, economist at Momentum Investments, was not quite so upbeat. On the face of it, the Budget was decent for the consumer, with some tax relief, she said, and may even produce a temporary uptick in spending, particularly among lower-income earners.
However, consumer confidence, like business confidence, has been weak for some time, and this will not change overnight. Unless there is more policy certainty, negative perceptions about the state of the economy will persist.
She said some of the contradictions in the Budget reflected ongoing policy uncertainty within the government: while it proposes to cut spending on wages, it has committed funding to a State Bank and a Sovereign Wealth Fund, and National Health Insurance is still on the cards.
On the government’s plans to cut the public sector wage bill, which many commentators have decried as an impossible task, Mantshimuli said there were ways the government could accomplish this without overly upsetting the trade unions, such as implementing realistic inflationrelated salary increases and absorbing the natural attrition of people retiring or leaving their jobs over the next few years.
DOWNGRADE ‘STILL LIKELY’
Johann Els, Old Mutual Investment Group chief economist, said that although the Budget was better than expected and the positives outweighed the negatives, “it was probably not good enough for [credit ratings agency] Moody’s, and I expect South Africa’s sovereign rating to be downgraded in March”. He said a “small probability”, however, remains that Moody’s may delay its decision to see how negotiations with the unions pan out.
A worry, which will feature on the radar of rating agencies, is that any expenditure savings will be “eaten up” by the growing interest rate bill on government debt. Els says interest payments will increase, on average, by 12% a year over the next three years.
While keeping the corporate tax at 28%, the Treasury appears serious about getting it down to a more acceptable rate globally, encouraging growth and investment.
However, the government is also serious about becoming more efficient in collecting taxes where they are due, and intends revising all corporate tax incentives with a view to eliminating those that are not effective or are being used as loopholes. This includes the section 12J venture capital investment incentive, whereby investors can deduct from income their entire investment, and corporate bursary schemes, which have been open to abuse.