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Leadership is tested in times of strife

Tuesday, 16 February 2016   (0 Comments)
Posted by: Author: Nazrien Kader
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Author: Nazrien Kader (Deloitte Africa)

Never before has the levels of interest of ‘arm chair’ budget observers been this piqued, nor have South Africans ever expected this much from a Minister of Finance. As our newly appointed Minister of Finance Pravin Gordhan presents his very first Budget Speech for 2016/17 on 24 February 2016 under his new term, he will be under intense scrutiny – something that he is certainly used to – firstly, because of the numbers he will present and the signals these are likely to give about Government’s intentions and secondly, because expectations are so high that Minister Gordhan will do something about the countries woes!

With a mandate few leaders would have the courage to take on, I surmise that 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 many, many commentators have noted, he will take the podium against the backdrop of the International Monetary Fund’s projection of a growth rate of just 0.7% for South Africa (economists put this in the ballpark of 0.9% still well below the 2% budgeted rate), a much debated electricity crisis with unaffordable options to increase capacity (e.g., nuclear, renewable energy, and off the grid production) a growing water crisis, a commodity crisis, rising inflation and the consequential rise in basic food prices, a highly volatile Rand, subdued economic growth bordering on recession, a rising tax: GDP ratio (from 24.9% to 25.7%), 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 will also be watching closely – ‘junk’ status has never been more possible.

Minister Gordhan has promised to ‘surprise’ his critiques – his confidence is contagious.

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. Minister Gordhan’s commitment to offering incentives and grants to attract foreign direct investment and stimulate growth in the critical industries such as manufacturing, mining and agriculture is commendable. No doubt, investors will be judging the ‘demonstration effect’ by how quickly the benefit of these incentives and grants offered through the tax system are felt.

Growth in the small business sector has always been seen as a means to reducing unemployment. With the establishment of the Department of Small Business Development and the appointment of Minister Lindiwe Zulu as Small Business Development Minister, it would be interesting to see what progress has been made in this area given the allocation of R3.4 billion (over three years) until 2018 for the development of this sector last year.

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.

Whilst raising taxes is usually unwise and unpopular in an election year, South Africans have been sufficiently warned of tax hikes and expectations are high that this will be a ‘watershed’ year for tax hikes. 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.

It is very possible that the marginal rate of tax for individuals may be lifted to the late 80’s level of 45%. There is scope to increase the proportion of capital gains subject to tax (currently 33%) – notably this will be a tax on capital not income. But it is far too premature to implement a so-called Wealth Tax or ‘Mansions Tax’ as is being bandied about in the UK. We can also expect a robust approach to the alignment of tax policy to global standards and a continued focus on the 3 Cs: (1) Compliance (2) Collections (3) Co-operation (locally with Business and High Net worth Individuals and globally with Revenue Authorities worldwide).

It is also conceivable that a special levy may be applied to companies based on turnover and individuals with earnings above a set threshold, to collect some tax from companies in particular, when profits are non-existent. Carbon taxes and other environmentally related taxes are also a potential source of revenue collections.

Above inflation rate increases to Indirect Taxes such as the fuel levy, which is a hot favourite, other ‘sin’ taxes, customs and global trade tariffs on luxury items , ad valorem duties and the like are a ‘MUST’ have, from Government’s perspective. Given the emotive response to a higher VAT rate, this is unlikely to go up. 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 collecting). The perception is that multi-national entities exploit loopholes in tax rules in order to shift profits to jurisdictions where taxes are lower.

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.

Another interesting development in the last few weeks has been the focus on the restructure implemented by Commissioner for the South African Revenue Service, Thomas Moyane and the rigour with which he has dealt with matters at the South African Revenue Service since his appointment. ‘Arm chair’ budget observers have watched with interest as the restructure was halted – indeed, we will also be looking out for signs of consistency in messages from Minister Gordhan to the South African public, on tax policy, proposals and enforcement in the long term.

Team South Africa has great expectations. Leadership is indeed tested in times of strife.

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