Strong government revenue growth should allow Minister of Finance Trevor Manuel to cut taxes when he announces the 2005/06 Budget on Wednesday, but economists are divided as to whether the beneficiaries will be individual tax payers or companies.
Investec Asset Management’s head of fixed income, Andre Roux, estimated that Manuel will have R9,5-billion in extra revenue that he could devote to personal income-tax reductions in the new financial year.
Roux predicted Manuel will use about R4-billion of this to offset the inflationary impact of bracket creep on personal income tax, while the additional R5,5-billion will be used to lower income tax for the low- and middle-income groups.
“This is likely to be more or less across the board, but skewed somewhat in favour of lower-income earners,” he observed. “Given that the money will be given back to the consumer, it would naturally be supportive of consumer spending and hence the retail sector. However, it will probably reduce the prospects for further interest-rate reductions.”
A less likely option for the surplus cash is to eliminate the tax on retirement funds, Roux said.
“It would make a lot of sense, because it is unfair that interest-bearing instruments should be taxed in retirement funds, while other assets are unaffected. It is also clear that [the National] Treasury is in broad agreement that this tax has to be drastically reformed or eliminated. Were it to happen, it would be very bond-supportive, but we, however, doubt that it will happen this time.
“The tax treatment of retirement funds is part of a larger regulatory reform process that still has some way to run.”
The third and “most exciting” option for the minister to choose is to reduce the company tax rate, Roux noted, which could be done by close to 2%.
“While it would be perceived as a very bold move, it would certainly be broadly consistent with the sentiments expressed in the president’s State of the Nation address, in which he spoke about improving the incentives for investing in South Africa,” observed Roux.
On exchange controls, Roux said there is a “very good chance” Manuel will make a significant announcement. Given the exceptionally firm rand, there is a “golden opportunity” for them to be lifted.
However, he believes that until the amnesty process is completed, individual exchange controls are unlikely to be lifted. This leaves institutions as the area most likely to be addressed in the upcoming Budget.
“We think there is a fair chance that the 15% so-called prudential limit on international investments by pension funds will be raised to 20%, and possibly even 25%. If, at the same time, the current cumbersome administrative application procedures were streamlined, it is likely that institutions would use this opportunity to move funds abroad.
“Even though international returns aren’t currently particularly exciting, the balance of risks must be that the rand will depreciate over the next few years,” he concluded.
Standard Chartered Bank economist Razia Khan thinks Manuel could ease limits on institutional investment into the rest of Africa.
Given the small size of existing portfolio flows into the rest of Africa, this will not pose any danger to the currency either, but it will signal an important win for the authorities, otherwise reluctant to dismantle institutional controls entirely.
Sanlam economist Jac Laubscher, by contrast, argues that Manuel should increase the value-added tax (VAT) rate to dampen consumer spending, and use the extra money to cut corporate income tax further in order to encourage investment and job creation. He acknowledges that such moves are, however, politically impossible.
This is the opposite view of the People’s Budget proposals, which look for a cut in the VAT rate to help the poor and the introduction of variable rates of VAT.
The People’s Budget is presented annually by the South African Council of Churches, the South African Non-Governmental Coalition and the Congress of South African Trade Unions. — I-Net Bridge