/ 21 February 2007

Not all praise for Manuel’s budget

South Africa’s economic growth mix needs to shift from being consumption-driven to investment-driven, and the country needs to compete to attract more foreign direct investment, Democratic Alliance finance spokesperson Ian Davidson said on Wednesday in reaction to Finance Minister Trevor Manuel’s budget speech.

He added that a cut in the corporate-tax rate would have been justified.

“Once again Minister Manuel has failed to give any significant measures to stimulate the supply side of the economy, boost confidence, bring down the cost of doing business in South Africa and stimulate private-sector investment,” Davidson said.

Manuel’s “sole gesture” was the reduction of secondary tax on companies from 12,5% to 10% and shifting the burden on to the investor by reintroducing a tax on dividends last seen in 1990 — ostensibly to broaden the already expansive income-tax net, argued Davidson.

“The result is South Africa’s effective corporate tax rate remains uncompetitive, particularly in comparison to our competitors among emerging market economies.”

Davidson was “further disappointed” by the nature of the wage subsidy announced by Manuel. “Instead of it being structured in a growth-oriented way to encourage greater employment in the economy, it seems to be more redistributive in nature and aimed at subsidising the cost of the social security tax for low-income workers.

“Further details are also awaited in terms of the announced national retirement savings arrangement, which we do cautiously welcome but reserve further comment until there is greater clarity on key aspects such as the transferability aspect, the vesting of benefits, details about the funding, the nature of the benefits as well as the role of the private sector.”

Davidson, nevertheless, welcomed the “moderate” personal-income tax-bracket creep adjustments; the elimination of the tax on retirement funds; and the streamlining of the regulation of retirement funds.

On the spending side, he welcomed the increased allocation of R3,3-billion a year over the next three years to expand police numbers and improve the salary structure, and hailed the increased allocation of R1,5-billion over the next three years to improve court capacity, reduce case backlogs and improve the administration of justice.

The R8,1-billion increase over three years for the hiring of teachers, teaching assistants and support staff, adult basic education and university allocations will “certainly go some way in addressing our skills shortages”, said Davidson. The R5,3-billion on increased remuneration for health workers, hospital revitalisation and, particularly, the R1,7-billion for people living with Aids was also welcomed.

Companies ‘ignored’

Meanwhile, Mike Schussler, chief economist for investment holding company T-Sec, told the Mail & Guardian Online that companies were being ignored in the budget. “Companies didn’t get the kind of tax relief to be able to compete globally,” he said.

Schussler explained that the average level of corporate tax is below 30% in most countries. In South Africa, it stands at 36%, including the dividend tax that replaces the secondary tax on companies currently in place.

“This number is much higher than the rest of the world and we have to take that into account,” he said. “Companies no longer have the voice they used to have, and they need to have that voice because they bring money in [to the country].”

Schussler said there is a need to bring more companies into the country’s “tax net”, and this could be a possible disincentive.

However, he said: “I don’t think [the lower tax cut] is going to have a negative effect on job creation,” adding that there is still a need to grow the job market quicker than at the current rate. “Growth has been reasonable, but not brilliant, and we need brilliant growth to achieve the 2014 goal [of halving unemployment].”

Schussler said that, all in all, there weren’t any particularly bold or unpredictable moves in Wednesday’s budget. Even the abolition of the retirement fund tax was “expected after last year when he halved it”. Still, he said the move will be very positive for many people with retirement annuities, pension funds and the likes.

Surprises

Jac Laubscher, group economist for Sanlam, told the M&G Online there were a couple of surprises in the budget, such as the secondary tax for companies being removed in favour of a tax on dividends, the abolishing of the retirement-fund tax, and the R8,4-billion tax relief targeted at individuals.

He said he thinks the government wants reform of the country’s retirement provision system before it eliminates retirement-fund taxes, but added that the move will “certainly be helpful [to many people] as it means the government takes less from your pension fund”.

Regarding tax relief, Laubscher said it will take place across the board for individuals, but there will be greater tax cuts for those in lower-income brackets.

Talking about tax cuts for companies, he said the government doesn’t have enough leeway in the budget to offer effective tax relief to companies. Tax relief should be approached “holistically and specifically”, he said, adding that when tax cuts are offered to companies and not individuals, “some people channel their income through these companies to pay less tax that way”.

Company tax cuts have to work with the top marginal rate “to eliminate these distortions”, he said.

Although there is an increase in spending for crime prevention, Laubscher said he doesn’t believe crime is primarily a budget issue. “It’s not just about giving the police more money and resources.”

He also said it is a good sign that social-welfare spending has increased above the inflation level, but added that the government’s eventual plan is for “social-welfare spending to become relatively smaller as more and more people become self-sufficient … not just for the sake of the economy, but also for their human dignity”.

The budget’s allocation of more money to infrastructure than to social welfare is a move towards that eventuality.

Laubscher appreciated Manuel’s emphasis on saving money and avoiding excessive debt, but expected more detail on wage subsidies and social security taxes. “We will have to see … there are a lot of questions and we don’t know the answers yet.”

OTHER REACTION

The Inkatha Freedom Party has welcomed Manuel’s budget speech, calling it “user friendly”. It has been made possible by the over-recovery of income from taxation — particularly from corporate companies, said IFP finance spokesperson Hennie Bekker.

He said the IFP agrees it is time greater social spending is introduced and a compulsory government pension fund launched. However, he cautioned against “the creation of a ‘welfare honeypot’ that can be creamed off by corruption”.

The giant petrochemicals firm Sasol will study recommendations by a task team that considered a possible windfall profits tax and an incentive arrangement for new investment in liquid-fuel production capacity.

The company welcomed Manuel’s announcement in his budget speech that the recommendations will be released at the end of the week.

“We are pleased to note that government will consider … the cost structures and future investment plans of affected taxpayers, together with the country’s long-term liquid fuels requirements,” read a statement issued shortly after the budget speech.

Manuel said he will refer the regulatory aspects of the report to the minister of minerals and energy for further consideration. “I believe there is merit in these proposals. However, we will consult the industry before we finalise this matter,” he said.

The budget will have a positive effect on business confidence and investment, the National Association of Automobile Manufacturers of South Africa (Naamsa) said on Wednesday.

“In summary, the budget would place South Africa on a higher growth path and was consistent with the objective of stability and predictability in government policy,” said Naamsa president Johan van Zyl. “Overall, the proposals would stimulate investment, economic growth, development, employment and sustain consumer expenditure. The budget should be well received by the business community generally.”

The 2007 budget is “largely neutral” from a property perspective, Jawitz Properties commented on Wednesday. There are no changes to transfer duty percentages or the thresholds below which transfer duty applies, said chief executive Herschel Jawitz in a statement.

“This was largely expected given the significant relief in the 2006 budget, and the fact that the zero threshold for transfer duty at R500 000 still covers the low-price/low-income market, despite increases in property prices over the last year.”

There were also no changes to the thresholds for capital gains tax, which remains at R1,5-million.

The extra money budgeted for the Health Department means better salaries for health workers — particularly nurses, it commented on Wednesday after Manuel’s Budget speech.

The additional R5,3 billion allocated for human resources was in response to the department’s proposals, said spokesperson Sibani Mngadi. “With this allocation, we are now in position to commence consultations with employee organisations on these proposals that will lead to improvement in remuneration for health workers particularly the nurses.”

Save for a few “thorny issues” the Federation of Unions of South Africa (Fedusa) welcomed the Budget. The abolition of tax on retirement funds was one of the key announcements welcomed by the federation.

“Trustees must ensure that workers reap the benefits of this decision or be held accountable,” said Dennis George, general secretary of Fedusa. He also welcomed the personal tax relief of R8,4-billion, and the increase in the monthly monetary caps for tax-free medical-aid contributions. However, Fedusa felt that these could have been increased further.