Pressure on finance minister ahead of his first budget

Finance Minister Nhlanhla Nene is in the pressure cooker in the lead up to Wednesday’s budget speech in Parliament where he is expected to lay out a plan to plug South Africa’s fiscal gap.

In his first mini-budget speech last year, Nene indicated that R22-billion of fiscal tightening was on the cards for the coming financial year and that this would be achieved by raising revenues and cutting expenditure.

But ailing parastatals such as SAA and Eskom continue to seek assistance from the treasury. And the country has already been plunged into darkness as the power utility has had to resort to load shedding to keep the lights on as the money for running its diesel generators dries up.

Former finance minister Pravin Gordhan has previously said that annual domestic growth of 5% is required to achieve the income levels required to support government’s goals, as outlined in the National Development Plan. 

But South Africa has missed that target by a long shot in recent years and in February the Reserve Bank revised its growth forecast for 2015 down to 2.2%. Now everyone is wondering where Nene will find the money and what revenue measures he will implement.   

A mix of increases
Barclay’s research team for emerging markets said in a recent press release that personal income tax looks likely to exceed the medium-term budget policy statement target by about R9.8-billion while VAT could outperform the target by about R1.5-billion. 

“On the other hand, corporate tax revenues look set to underperform by about R8.7-billion, perhaps showing more sensitivity to the growth environment. Assuming that the current year-to-date [tax revenue] growth rate of 9.1% is maintained through the rest of the fiscal year, total tax revenue comes in just R1.6-billion lower than in the medium-term budget policy statement’s projection.”

Barclays predicts Nene will seek to raise the additional revenue through “a mix of increases in the fuel levy, the top marginal rate of income tax, the usual ‘sin’ taxes, estate, dividend and capital gains taxes”. 

Barclays said it did not, however, expect any changes to VAT, corporate income tax or the mining tax regime.

Grow the economy
Deborah Tickle, partner in global international corporate tax and transfer pricing services at KPMG, said the key for the government would be to grow the economy, which would, in turn, increase general wealth and corresponding taxes that could be collected. 

“It’s a self-fulfilling prophecy, but unfortunately it is not going that way at the moment … One thing government has done is improve collection and broaden the base but it needs to do that more.”

Tickle also did not foresee Nene raising the corporate tax rate. “[The] Davis Tax Committee doesn’t recommend it. If you are looking for growth [then] the one area you don’t mess with is your corporates.”

The economically logical choice, Tickle argued, would be to raise VAT by 1%. “Oil prices are lower and people are seeing the benefit in their pockets, [so] it gives Nene the opportunity to raise the VAT rate.”

Tickle said South Africa’s VAT rate, at 14%, is comparatively low. The global VAT average is 15.83% while the average rate in Africa is 15.1%.

“We are fairly low on the global stage on the VAT side, and from Nene’s point of view we can and would solve our problems for the current year if we raised it.”

Tickle said estimates are that hiking VAT to 15% would result in additional revenue of between R18-billion and R20-billion.

Scope to increase VAT
Ferdie Schneider, national head of tax at business consultancy BDO, said “the main instrument available to the treasury is the VAT rate” and that there was scope to increase it, as it had not been raised since 1994. But he admitted the move would not go down well with labour unions and the majority of voters.

“With [local government] elections coming up [in 2016], politically the idea will probably not be getting enough support, but economically, I think it may be the right thing to do.”

Barclays said even though there are arguments in favour of increasing taxes on consumption in general, it doubted Nene would look at raising VAT or implementing any other tax changes that adversely affected the poor more than the rich.

Tickle, however, said that raising VAT may not be as politically impossible as many may think. “In his speech two or three years ago, Gordhan said one of the ways to raise additional revenues might be to increase VAT and there was no reaction at all. So I think the political reluctance may be overstated. The timing right now would probably be perfect – inflation is in check and the oil price has been low for a while.”

Wasteful expenditure
Tickle said Nene had indicated, in his mini-budget last year, that the treasury would also have to look at wasteful government expenditure. “There is room to cut costs, but this is something ministers of finance have been saying for a very long time … If government could be serious about implementing this, there is a lot of spare cash on that side,” she said.

Barclays said one of the most interesting aspects of the budget will be the list of nonstrategic state assets to be sold to finance state-owned enterprises (SOEs). 

“We think the government will focus on its stakes in listed companies such as Vodacom, but it may possibly be bolder and also put up for sale indirect stakes in listed companies (such as those held on the balance sheets of SOEs) or selling SOEs or parts of themselves,” the bank said. 

“A bold approach here would be a tremendous boost to market confidence.”

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