All eyes are firmly fixed on South Africa, as Honourable Finance Minister Malusi Gigaba prepares to deliver his inaugural Budget speech on Wednesday, 21 February 2018.
Whether last week’s trip to Davos – in its aftermath, being referred to as the ‘Cyril Ramaphosa effect’ - was sufficient to convince the international community that South Africa is open for business, remains to be seen. All indications are that the right noises were made. The difficult part is to deliver on the promises made. The outlook for Minister Gigaba is daunting.
This year, allegations of ‘state capture’ and corruption in South Africa continue to cast a cloud over our future prospects. The South African government remains pre-occupied with bailouts for state-owned entities – even while economists estimate that revenue collections will fall further short of budget continuing the steady downward trajectory (from an estimated shortfall of R30 billion earlier in the fiscal year to between R50 billion to R65 billion more recently – widening to R69.3billion in 2018/19 and R89.4billion in 2019/20). Rating agents continue to have the country on strict watch.
The recent International Monetary Fund’s projection of a growth rate of under 1% for South Africa (the South African Reserve Bank Monetary Policy Committee expects the growth rate to be higher at 1.1% whereas South African economists put this in the ballpark of 1% - still below the 1.3% per the 2017 Budget), the worsening drought conditions, a volatile Rand, a rising tax: GDP ratio (from 24.9% to 26.2% - the highest in 6 years and by global standards, amongst the top 10 in the world) 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.
In a near ‘perfect storm’ scenario that South Africa finds itself in, it is perhaps the perfect time to launch reform – both structural and tax reform – is a sure way to stimulate the economy.
This year’s budget speech is expected to be a real ‘show stopper’ – a watershed year for tax hikes given the projected budget deficit of around 4.5%. A continued focus on cost reduction is vital but can only yield so much. Minister Gigaba has a tough job on his hands as he will have to negotiate multiple, sometimes conflicting, priorities.
The profile of tax collections is expected to mirror that of previous years (with personal income taxes likely to retain the highest level of contribution, VAT a close second and company taxes third in line). It is also to be expected that the focus will continue to be tax anti-avoidance in the form of measures to counteract tax-base erosion and profit-shifting for companies and wealthy individuals (including the expat community), as well as the hotly debated ‘wealth tax’.
Over the past few years, Treasury has repeatedly emphasised the need for austerity measures in the face of sluggish economic growth. This year, Minister Gigaba will be juggling both the case for austerity and the need for enhanced public spending for both education, drought relief and infrastructure. His choices now will affect the decisions of international credit ratings agencies Fitch, Standard & Poor, and Moody ’s , with the market already pricing in a downgrade to South Afr ica’s sovereign risk rating.
South Africa is facing the 4th year of a drought - the worst since our records began in 1904 and it isn’t over yet. We would expect to see higher priority given to water infrastructure and maintenance, as well as increased assistance for affected farmers.
Meanwhile, given Government commitment to free tertiary education and the #Feesmustfall movement, Minister Gigaba will have to make it clear how he intends to make good.
Some of the additional tax revenue generation options on the cards are:
A Surcharge Tax on Wealthy Individuals and all Companies
After the recent increase in the marginal rate of tax for individuals lifted to the late 80’s level of 45%, it is conceivable that a special levy or surcharge may be applied to individuals with earnings above a set threshold. This is also likely to apply to companies based on turnover as a means to collect some tax from companies when profits are non-existent in a slow/no growth environment. There is little scope to increase the proportion of capital gains subject to tax (currently 40% for individuals and 80% for companies and trusts). Incidentally, the Africa average for individuals’ tax rates hovers around 33.3% (which compares with the global average of 33.2%).
Wealth taxes: R3bn - R5bn
The Davis Tax Commission (DTC) has made several recommendations to restructure tax policy around trusts, estate duty and donations between spouses. The aim is to increase tax collection on inter-generational wealth transfers. These taxes could increase tax revenue between R3bn – R5bn per annum.
Value Added Tax (VAT): R15bn – R20bn
According to the Budget Review 2016 South Africa’s VAT rate is lower than most other jurisdictions (in the ballpark of 20%). On the basis of research done by the DTC, an increase of VAT from 14% to 15% (more aligned to the global average of 15.64% and Africa average of 15.25%) is likely to add R15bn to R20bn to revenue. This would however have the consequential impact of a reduction of 0.2% to 0.4% on GDP as well as an increase in inflation. A more palatable change (as opposed to an overall increase in the rate of VAT) would be the implementation of a tiered VAT system or the implementation of a dual rate (higher rate for non-essential/luxury items).
Sugar tax: R11bn
Although preliminary research suggests that around R11bn could be raised through taxing sugar products, this figure is debatable as there are many variables yet to be finalized.
Fiscal drag: R12bn to R15bn
One way to increase tax revenue without actually increasing the tax rates is to do nothing – in other words, if the tax tables are not amended to adjust for inflationary wage increases, it is possible that an additional R12bn to R15bn could be collected. The less relief provided for fiscal drag, the higher the contribution to additional revenue.