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#Budget2016: Expect tax hikes

18 February 2016   (0 Comments)
Posted by: Author: Nicola Mawson
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Author: Nicola Mawson (IOL)

Today marks just a week to go before Finance Minister Pravin Gordhan presents his much-anticipated annual budget to Parliament.

This year’s budget, probably one of the most important to be delivered in several years, will be presented at a time when SA faces the risk of a ratings downgrade to junk status - making the country unattractive to investors and raising the cost of borrowing. It also comes when the rand continues to hover just below R16 to the dollar, prime interest rates have moved to 10.25 percent and Moody’s has warned that the worst drought on record could plunge SA into a recession.

The budget speech comes almost two weeks after President Jacob Zuma presented what many say was his toughest State of the Nation Address (SONA) since he took office in 2009. In that address, he put the country’s economic woes front and centre in his speech, although many thought he fell short of providing meaningful explanations as to how SA Inc would turn the ship around.

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This granular detail is expected to be detailed by Gordhan, and the speech is bound to be one of the most eagerly watched in quite some time - especially as it marks the minister’s return to the portfolio after last year’s sensational axing of Nhlanhla Nene and his replacement by unknown David van Rooyen, who was booted a few days later and replaced with Gordhan.

Many feel Gordhan will have a tight hand on spending.

René Grobler, head of Investec Cash Investments, notes "disposable income will be tight this year, so I'm hopeful that we can get SA's economic engine going in order to create income and enable South Africans to save”.

So, what can South Africans expect from the budget? IOL has asked several commentators what their views are, and this is what they have to say:

What to expect

Professor Andre Roux, professor in economics at the University of Stellenbosch Business School, notes the budget speech is much more than just a simple exercise in bookkeeping; it is also an instrument of economic politics, in that it provides an indication of government's intended policy stance during the coming financial years.

"This year's budget speech will be one of the most important events in South Africa's recent history in the light of the pedestrian rate of growth in the domestic economy, the recent three-finance-ministers-in-one-week debacle, the threat of junk bond status, and the (possibly unfair) expectation that the finance minister should give substance to a wide range of platitudes and promises extended by President Zuma in his SONA.”

Maarten Ackerman, advisory partner and investment strategist at Citadel, notes, although Gordhan is arguably the best man for the job, he faces a huge challenge given the current economic environment.

Read also: Tax hikes won’t solve SA’s economic dilemma

Roux says Gordhan faces the dilemma of having to make a trade-off between efficiency, giving society as much as possible for each cent, and distributing resources equally. He notes the current reality calls for a commitment to "get the basics right”.

"Investors are looking for fiscal (and monetary) discipline, and investor-friendly and predictable, surprise-free policies.”

Ackerman expects Treasury to lower its economic growth assumptions sharply and up inflation assumptions for the next few years. However, it will try to be more upbeat than the general market as they need to convince rating agencies and the market that the fiscal situation is likely to improve in future.

To back this more upbeat view South Africans can expect the announcement of clear pro-growth policies, says Ackerman. Yet, he adds, lower growth won’t help to alleviate the pressure on the budget deficit, a measure keenly watched by rating agencies. "Given a weak growth backdrop, Treasury will need to show clear plans to cut back on all expenditure – especially non-essential spending. We can also expect clear actions to increase government revenue.”

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Roux adds: "Right now, the SA economy is in ICU; drastic and painful treatment is the only way to ensure that the patient can progress to a general ward; from there to a tentative jog, and ultimately a marathon run towards meaningful growth, development and job creation.”

The tax question

Roux notes Gordhan needs to display fiscal restraint and cut down on budget deficits, eliminate wasteful spending and confine handouts to the minimum. Yet, he adds, Gordhan also has a shrinking tax base, which implies an increase in one or more types of taxes. "In the short term this is obviously all very painful, and unlikely to generate much growth, but the last thing we can afford now is a descent into fully-blown junk bond status, with the concomitant implications for both the accessibility to and cost of foreign lines of credit.”

Ackerman argues that borrowing more is not really an option to increase revenue, as government debt to gross domestic product is already north of 40 percent – above levels acceptable to rating agencies. Interest payments have also risen to uncomfortable levels. "This gives Treasury no choice but to increase taxes to underpin revenue. There are many ways they can achieve this, and to be honest, at this point in time, especially given that it is an election year, any suggestion from our side will only be speculation. But, be prepared to leave the room on February 24 with less money in your pocket.”

Besides the obvious and predictable increases in sin taxes, an increase in personal tax rates is virtually unavoidable, says Roux. He questions whether the VAT rate will be raised for the first time in decades.

Madeleine Schubert, strategic director at Citadel Fiduciary, says taxes will go up, and this cost will most likely be borne by the middle- to higher-income earners. "We suspect that personal income tax will be increased by anything from 1 percent to 1.5 percent.”

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Schubert adds it is doubtful whether there will be an increase in the corporate tax rate at this time, but an increase in capital gains tax (CGT) may be on the cards. Dividends tax for now will remain unchanged.

"We suspect that there will be an adjustment to the value added tax (VAT) rate of around 0.5 percent in general and a 1 percent increase for luxury goods.”

State-owned entities

Roux also questions how the minister will address the "prickly issue of regular life-support to expensive and inefficient SOEs” and dealing with the "rapidly rising costs of maintaining a bloated civil service”.

Rob Price, economist at Investment Solutions, adds the Treasury needs to create conditions for sustained economic growth to attract investment and create more jobs.

"Minister Gordhan should cut regulation and red tape, which are a major hindrance for investors. The most important part of the solution is unsustainable government spending.

"We require severe cuts to the public sector and spending by state-owned enterprises, which are an efficient use of state resources, a drag on the economy and a strain on the fiscus.

"If government doesn’t begin to prioritise spending more efficiently then other more important spending items with come under pressure, like education and welfare spending. It is also important for the minister to avoid further tax increases which are growth negative, and won’t solve the current economic malaise.”

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