Saving in a constrained global and local environment

Finance Minister Pravin Gordhan’s pulled a rabbit out of the hat once again and delivered a Budget Speech that left most fairly relieved. The Budget itself had a strong focus on saving in the midst of a challenging local and global economic environment. The savings theme came through at both a personal and environmental level. Very encouragingly, the Minister provided some details on a new tax-free savings account that will be introduced in 2015. The savings account will have an annual deposit limit of R30,000 with a lifetime limit of R500,000 (adjusted for inflation) and will likely see the interest income tax thresholds falling away over time. On another positive note the Minister announced plans to harmonise the tax treatment of retirement annuities, pension funds and provident funds with a uniform tax advantage of 27,5% of remuneration on each form of retirement funding. He also encouraged employers to direct their departing employees towards provident funds in order to preserve their retirement benefits rather than squander them. 

Saving the environment will come at a short-term cost to households but future generations should benefit from government’s proposed new carbon tax, which will see the light of day in 2015. This tax was something of a surprise but the Minister did, however, promise to soften the blow of the new tax with an introductory  tax-free exemption of 60% that will be phased out over time. The current carbon tax on new vehicle sales was also increased and this may inspire some short-term new car buying ahead of the increase.

The R7 billion of personal income tax relief granted by Minister Gordhan should be welcomed by individual taxpayers but the magnitude of his generosity fell short of the R9,5 billion that he offered in last year’s budget. The tax brackets were also adjusted for "bracket creep” but the nominal percentage increase was less than the Minister’s own forecast for inflation and individuals will ultimately be left worse off in real terms. The VAT rate and the upper marginal tax rate were left unchanged and that was good news for all the economy’s citizens but the promise of a Tax Policy Review may see changes to those taxes and tax rates over the years to come.

There were no real shocks in the budget other than the magnitude of the budget shortfall for 2012/13. The revenue shortfall of R16,3 billion in a tough economic environment explains the size of the budget deficit but the good news is that the Treasury’s projection of the budget deficit for 2015/16 remains unchanged at 3,1% of GDP  - as tabled in the Medium - Term Budget Policy Statement. Growth projections for the next three years have been lowered with the economy forecast to grow at a revised pace of 3,8% in 2015 (from 4,1%), still very short of the level needed to make a meaningful dent in the unemployment rate. The increase in the fuel levy of 22,5c/litre was probably also more than expected and not what cash-strapped travellers wanted to hear.

Overall though there was a renewed commitment to stamping out corruption and the appointment of a Chief Procurement Officer is testimony to government’s resolve.  The Finance Minister also made a renewed commitment to the National Development Plan and the associated infrastructure programme. While the planned R827 billion infrastructure spend over the next three years may not make a big dent in unemployment directly, there should be many indirect employment benefits over the longer term.

Last year the Minister made a call for a greater level of co-operation between the public sector and the private sector. He once again made a plea for all of the economy’s stakeholders to work together to build the economy that we all want to see. In the Minister’s own words, "South Africa’s economic outlook is improving, but requires that we actively pursue a different trajectory if we are to address the challenges ahead”. That is as much the responsibility of government as it is for each and every South African.

Source: Craig Pheiffer, Head: Private Client Asset Management, Absa