Matthew Lester: The uncomfortable dilemma facing Nhlanhla Nene (with video)
20 February 2015
Posted by: Author: Matthew Lester
Author: Matthew Lester (Biznews.com)
Ten years ago a ticket to attend the National Budget speech was more socially prized than a ticket to the J&B met horse race. The speech was the big parliamentary event, perhaps even bigger than the State of the Nation Presidential address. There was so much to cheer about as then finance minister, Trevor Manuel, led the nation in celebrating the economic recovery of the rainbow nation.
Post the financial crisis there has been little to celebrate. In fact the media prominence of the Oscar Pistorius saga has quickly pushed budget announcements to page 2 news.
Just a year ago one could be forgiven for thinking ‘finance minister, Pravin Gordhan (PG) can retire when I’m dead.’ Most believed that PG had the safest hands in the country.
Then came the shock announcement in May 2014 that PG had been redeployed and that his deputy, Nhanhla Nene, had been promoted to Finance Minister.
Click here to view video.
On 22 October 2014 Nene kicked off with the Medium Term Budget Policy Statement ‘MTBPS‘ with the ominous lines ‘The choice we face in considering these proposals is a difficult one. But we believe that this course can no longer be postponed.'
So, after 18 years of Manuel and PG, South Africans face a potential game-changer budget on 25 February 2015. Rumors are rampant. Is this where the taxpayer will bite the bullet?
The fundamental issue of Budget 2015
Perhaps PG’s fundamental mistake was that he believed in what the economists had to offer back in 2009. They predicted that internationally public debt would increase by nearly 200% post the financial crisis but that this would tail off as Gross Domestic Product growth levels returned within 2-3 years. And tax collections would follow the trend.
Since 2008 RSA has accumulated R1,3 trillion in National Debt. 2012 forecasts showed that national debt levels would peak by 2014/15 and then tail off. This was again revised in 2013. But by 2014 the ominous undeniable truth emerged that there was no end to the debt trajectory.
Thus Nene announced that steps have to be taken to contain the national debt trajectory. Doing nothing is just inviting the sovereign debt rating agencies to downgrade the Rand to junk status. This will require an annual reduction of debt levels of about R30 billion per annum, R15 billion to be provided by the taxpayer and R15 billion reduction in state expenditure.
South Africa’s budgeted tax collections for 2014/15 are just on one trillion rand. Thus it would seem that R15 billion or a 1,5% increase should be quite easy to share around.
Source: SARS statistics 2014.
South Africa has three primary taxes, Personal Income Tax ‘PIT’ (red), corporate income tax ‘CIT’ (blue) and VAT (light blue). All the other taxes (grey) do not even make up for one of the big three.
R15 billion could be accommodated in one move, increase VAT to 15%. But that is not a politically acceptable solution and would reduce RSA to a national strike.
R15 billion could be collected in PIT. But that would place massive strain on all 5 million taxpayers above threshold. It would wreck all the years of effort to keep fiscal frag burden off individual taxpayers and increase their tax burden towards 40% of total tax collections.
CIT is already strained as SARS statistics 2014 reflects ‘The decline the relative contribution made by companies ‘CIT’ is often overlooked, declining from 22.9% in 2009/10 to 19.9% in 2013/14. Reduced CIT collections resulted in a higher relative contribution by Personal Tax ‘PIT’ . The contribution of PIT to total tax revenue was 34.5% in 2013/14. The extent of the shift is shown by the fact that while PIT contributed only R28.9 billion more to tax revenue than CIT in 2008/09 it provided R131.4 billion more than CIT in 2013/14.'
So no one tax can provide the solution. And it is impossible to quickly implement a new tax (for example Carbon Tax) without a lengthy legislative cycle. RSA will have to go with what its got! Nene is not spoilt for choice.
Is fuel tax our savior?
A lot has changed since October 2014. The oil price has almost halved and currently the consumer is enjoying as much as R4 per liter off the price of petrol. Some calculations reflect that this is equivalent to a R50 billion per annum economic stimulus package. This is already helping retail sales and Vat collections.
Before getting to excited please consider that oil price reductions are not all good news. Yes, the consumer is feeling a bit better. But CIT collections from some of RSA’s major resources companies must be spiraling downwards.
But surely a substantial increase in the fuel levy could still save the day.
In very rough terms RSA consumes about 14 billion liters of fuel per annum. So a R1 per liter increase could potentially save the day. A lot of economists and pundits are making this call.
In recent weeks the oil price has been steadily recovering and is already above the $60 per barrel level. It would be a massive gamble to hang the nations hat on fuel levy. There could be disastrous consequences if all goes wrong.
Nevertheless I will eat my hat if a major slug of the tax increase doesn’t come from substantial increases in fuel and electricity levies. Perhaps R5 billion of the R15 billion.
Where the other R10 billion is going to come from is anyone’s call. PIT will have to take some of it. Companies will have little to offer and there are not enough smokers and drinkers to make much of a contribution.
Nene is facing the same problem as PG. The current tax base cannot handle the load unless GDP growth rates recover to above 3% pa. And with the current GDP growth rate struggling at around 1,4% that seems a long way off.
It was easy going for Trevor Manuel, high growth rates and plenty a low hanging fruit in tax targets. But those bullets are long spent.
But those days are long gone.
So buckle up for 2pm on 25 February 2015 ( if the EFF does not disrupt proceedings again). It is going to be a very interesting afternoon.
This article first appeared on biznews.com.