How the budget could impact your pocket

By Staff Writer

By Angelique Ruzicka, editor, 

Face it, doing a budget whether it’s your own or someone else’s is hard work. So spare a thought for Finance Minister, Pravin Gordhan, when he delivers his Budget Speech for the country tomorrow. The lie of the land isn’t pretty. Growth is slow, unemployment is high, many households are over-indebted, levels of savings are low and South Africa imports more than it exports. 

South Africans are in a tight spot financially, which means they are spending less. This hardly helps the country when for the fiscal year of 2013/2014 it is facing a fiscal deficit (when government is spending more than its revenue) of 4.2%. A 4.1% deficit is predicted for 2014/2015 and for 2016/2017 the deficit is set to be 3%. 

If government is spending more than what it’s getting in the bottom line is that it’s going to have to find the money to cover this shortfall from somewhere else. And where else could Gordhan possibly get this extra revenue from other than by increasing taxes? 

But it’s the election year – isn’t Gordhan going to be nice to Joe Public?
There’s no doubt that government is going to have to increase taxes somewhere. But as you so rightly say it’s an election year and government has to balance its needs with public sentiment. Increase taxes (particularly income taxes and VAT) and it will affect everyone – hardly something to make voters feel all warm and fuzzy about the ANC. 

Increasing VAT would not be a bad option for the government. The South African Institute of Professional Accountants (SAIPA) point out that when compared to other countries South Africa’s VAT rate of 14% is relatively low and Minister Gordhan would be perfectly in his rights to increase it to a possible 15%. But again, increasing VAT will mean everyone pays. To minimise the blow to the consumer he could add to the list of items that are VAT exempt, especially items that are mandatory purchases such as staple foods, school uniforms and books. 

If Gordhan doesn’t increase the individual tax ceiling (currently capped at 40%) you could expect him to do so at a much later date. However, not everyone may be affected by this. “An increase in individual income tax ceiling might seem like the least desired change but this increase will actually only affect a small portion of the population, being high income earners,” pointed out SAIPA in a statement. 

If you love your booze and cigarettes you are almost guaranteed to see an increase in the cost of these items. Tax on booze and cigarettes is often referred to as ‘sin tax’ because it is a tax on items considered most harmful or undesirable by society. An increase in the fuel levy may also be included in this year’s budget and again this is likely to affect most people’s pockets.

What about pension and savings reform?
You are right – the Finance Minister has made a number of statements over the last two years that could affect the way we save in general and how we save for retirement. Tax-preferred individual savings and investment accounts will be introduced in 2015.

Other than telling the public how much money can be invested in these products in a year tax free (R30,000 a year with a lifetime limit of R500,000) there hasn’t been much information provided so look out for what Gordhan has to say about it, if anything, this time around.

There’s been a lot of talk from Gordhan in recent years about making the preservation of pension savings compulsory. What this means is that the government wants to clamp down on the ability of people to draw on their retirement savings when they job hop. However, there may not be mention of it in this budget speech. “We don’t think they will follow through on that right now because the trade unions are not in favour of it and it is an election year and it therefore might be expecting too much of Treasury to touch on this ahead of the election,” points out Steven Nathan, CEO of 10x Investments.

However, Gordhan may again touch on the fact that tax treatments of pension provident and annuity funds will be simplified and harmonised. So there will soon be less confusion when it comes to how your retirement savings will be treated tax-wise.  

What about the debt problems we have in South Africa? 
Last year Gordhan highlighted the fact that the Treasury was concerned by the abuse of emolument attachment orders.  “We are in discussion with the National Credit Regulator, the Department of Justice and banks, to ensure that the lending market remedies its behaviour,” Gordhan reassured. 

However, whether we will hear of any progress in this space remains to be seen. Wilfrend Moyo, investment and economic strategist for Metropolitan feels there is nothing much the Minister can introduce to alleviate the debt burden. “Tax reduction is not the answer to financial ignorance. Every household should be disciplined enough to formulate a budget, and stick to it no matter how painful it may be. Financial discipline is critical to achieving financial success.”
Will there be any good news?
Some commentators are not predicting an announcement of huge job losses like we saw in the 2008/2009 budget cycle when 860,000 jobs were lost. “Instead we are likely to see slow job growth. There is also going to be a continuation of above inflation wage and salary increases and despite pressures, inflation is unlikely to rise to the same extent as previous cycles with companies finding it challenging to pass on price increases to a weakened consumer,” says Johan Els a senior economist at Old Mutual.

How will I cope?
Most commentators now feel that with the increases in living costs coupled with potential increases in tax and the fuel levy consumers will have no choice but to change spending habits.

“Consumers are urged to spend in ways that are sustainable. It is most probably not the last time that rates and fuel costs increase. Every individual must take responsibility for their own responsible spending habits; that is not the job of government, despite the various consumer protection laws,” points out Ettiene Retief, chairperson of the National Tax Stakeholders Committee of SAIPA.

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