/ 11 February 2010

Little tax relief expected in budget

There will be little tax relief in this year’s budget, Nedbank economists said on Wednesday.

“Personal income-tax relief will be limited, with individuals being at least partially compensated for bracket creep or the effects of inflation,” Nedbank said in a statement.

The circumstances could hardly be tougher, with government finances under significant pressure following the rapid deterioration in the global and local economic climate in 2008 and 2009.

Nedbank said inflation had moderated over the past year and this implied tax relief for individual taxpayers was likely to be well below the R13,6-billion granted last year.

However, low- and middle-income taxpayers were likely to get more relief than high-income earners.

According to Nedbank, the tax threshold was likely to be lifted from the current R54 200, but the top marginal tax rate would probably remain unchanged at 40%.

Nedbank expected the marginal raising of exemptions on domestic interest and dividend payments to continue.

This was compensation for the effects of inflation.

“The exemptions currently stand at R21 000 for taxpayers under 65 and R30 000 for those over 65.”

Nedbank said it did not expect a reduction in the company tax rate, which was dropped by 1% to 28% in the 2008/09 budget.

“We do not anticipate further relief for companies given that the economy is recovering.”

It said the VAT rate should remain unchanged at 14% and there would be “the usual” above-inflation increases in excise duties.

Turning to the issue of inflation-targeting, Nedbank said this practice had been “very unpopular” with the Congress of South African Trade Unions and other segments of the ANC alliance.

“The South African Reserve Bank’s focus on inflation in response to surging global oil and food prices during 2007 and much of 2008 also evoked substantial criticism and hardened alliance opinion against this approach to monetary policy.”

Nedbank said Finance Minister Pravin Gordhan had recently stated he would announce proposals or changes to the monetary policy framework that had been agreed with the central bank.

“This could consist of changes that broaden the Reserve Bank’s mandate to include growth and employment along with inflation in determining the course of interest rates.”

Nedbank said any significant changes to the current framework would increase the risk of subpar growth over the medium term.

“For example, raising the current inflation targets significantly from the current 3% to 6% may give the Reserve Bank scope for cutting interest rates in the very short term, but would quickly lead to higher structural inflation as expectations and behaviour start to adjust.”

This in turn implied that through-the-cycle interest rates would be higher, hurting indebted consumers over the medium term.

Similarly, a move away from inflation-targeting altogether would immediately boost inflation expectations and lead to a similar result, Nedbank said.

Gordhan is to table his first national budget on Wednesday February 17 2010. — Sapa