South African Finance Minister Pravin Gordhan has tabled a budget which aims to achieve a reduced budget deficit of 2.4% of GDP by 2018/19 while not over-burdening individual taxpayers. He has focused on reining in government spend and massaging income from higher income earners. As he stated in the speech: “We cannot spend money we do not have.”
“Although the rand seemed to vote on the Budget Speech with a 2% drop during the Minister’s speech, this is in part a return to more normal levels given that the currency rand had been one of the strongest emerging market currencies in the last three weeks,” noted Adrian Saville, chief strategist of Citadel.
It is significant that the Minister did not refer to a “developmental state” – a situation in which the government plays a lead role in driving economic growth. Rather he reinforced the message of the National Development Plan of a strong mixed economy with the public sector complementing the private sector. This focus is important – it brings stability to policy and will encourage clarity and visibility, the necessary ingredients for an investment friendly environment.
The economic growth targets in the Budget are modest: 0.9% in 2016, rising to 1.7% in 2017 and 2.4% in 2018. Achieving the revenue tabled in the budget will be challenging given the poor growth environment anticipated.
“What will be critical is to ensure the structural reforms necessary for economic growth are implemented. With the asset base of state owned entities over R1tr, the government sits on the largest balance sheet in the country but it is being inefficiently managed and we will need extensive financial re-engineering and efficiency to turn it around” noted Saville.
President Jacob Zuma referred to it in his State of the Nation Address earlier this month, saying that entities that are no longer necessary should be “phased out”. This is an encouraging move.
In his opening paragraphs Gordhan stated that “we should stop… bailing out state entities.” Another signal that the era of mismanaged state enterprises is coming to an end. He announced that a merger between SAA and SA Express is to be explored “under a strengthened board, with a view to engaging with a potential minority equity partner.” This is explosive and, if realised, it would significantly enhance government finances and investor sentiment.
“For individuals this budget should provide much relief. Anticipation of an increase in the marginal tax rate was widely expected but did not materialise and the fiscal drag adjustments will see relief of R5.6bn in personal income tax. Those earning less than R550,000 per annum will pay less tax,” explains Madeleine Schubert, strategic director: tax and fiduciary at Citadel.
The shortfall will be made up around the edges: a clever move to hike the fuel levy by 30 cents a litre which will be masked by the fact that over-recovery is currently 60 cents a litre; higher sin taxes (as always); a new tax on sugar-sweetened beverages; and more environmental taxes (including a tyre levy for recycling).
“The biggest negative impact for individuals will come from the higher capital gains tax inclusion rate which for individuals, special trusts and insurers’ individual policyholder funds rises from 33.3% to 40%. For other taxpayers the rate increases from 66.6% to 80%. The transfer duty on properties above R10m is to increase from 11% to 13%. As with previous budgets, the lower and middle income earners have been spared at the expense of the higher bracket earners,” elaborates Schubert.
For any taxpayers who still have undisclosed assets offshore, now would be the time to disclose them. Globalisation, improved technology and collaboration across tax jurisdictions mean that it will be increasingly hard to hide assets. A, perhaps final, voluntary disclosure programme will enable taxpayers to come clean with only a modest fine to pay.
All-in-all, this Budget Speech will move South Africa in the right direction, if the promises made can be implemented. We will need to demonstrate solid action at least by the October Medium term Budget Policy Framework, to hold back a downgrade of SA’s credit rating to below investment grade.