Against the backdrop of sudden cabinet shifts, looming junk status threats, an ongoing drought crisis and the weak state of the Rand, this is said to be one of the most important budget speeches to date for Minister of Finance Pravin Gordhan. With much of the expected burden to land on the shoulders of the consumers in the form of tax.
We take a look at what some predict will be announced on Wednesday:
Expect tax hikes
To prevent a downgrade to South Africa’s debt, government will need to make some difficult decisions that will reduce the budget deficit faster than the targets set in the medium-term budget in October 2015, stated Old Mutual investment group senior economist, Johann Els.
“Most of the deficit reduction will likely come from tax hikes since reducing government’s expenditure ceiling significantly seems challenging right now,” he explained.
He further predicted that the ‘easy wins for Treasury will come from consumer tax increases, where high income earners will likely be targeted.’ Other possible changes could include the raising of the ‘effective rate for Capital Gains Tax.’
Els added that in order to spread the tax burden more widely across all consumers, Treasury’s revenue increase options might also include a VAT hike of 1% and/or a big fuel levy increase.
Old Mutual Investment Group chief economist Rian le Roux told Business Day that a percentage point rise in the VAT rate to 15% would give the state an additional R20bn.
Analysts agree on tax move
Eugene du Plessis, director and leader of tax at Grant Thornton is of the opinion that, “cutting government expenditure and restoring key parastatals to profitability while raising revenue to balance the budget, is the key.”
Du Plessis, similarly, agreed that ‘the minister will no doubt impose some form of incremental tax increases targeted at high net worth individuals. These may take the form of increased marginal tax rates for individuals and trusts, higher capital gains tax (CGT) rates or special wealth taxes.’
Contrary, to popular belief, Judge Dennis Davis, head of the Davis Tax Committee set up to re-examine the country’s tax system, has stated that ‘Gordhan is unlikely to meddle with the Value added Tax (VAT) rate in this local government election year. According to the Davis committee, research shows the effect of increased VAT is far greater on the poor.’
Du Plessis adds that there is a chance the minister may introduce a dual VAT system, but that this would require special legislation and the introduction of an array of new systems, so it seems unlikely.
Other predictions included, the notion that there will be further emphasis on ‘cost-containment, curbing tax evasion as well as further implementation of the base erosion and profit shifting (BEPS) programmes, in line with worldwide focus.‘
Business impact
The head of analytics for First National Bank (FNB) business, Yudhvir Seetharam, also weighed in, addressing the importance of the speech for small business. “The National Budget Speech has a direct impact on the bottom line of small and medium-sized enterprises (SMEs) and influences long-term business decisions.”
One of the outliers, he similarly identified, was tax. “This should be watched closely as high unemployment, decreasing disposable income of consumers and the slowdown in economic growth are currently leading to lower tax revenues for the government. Meanwhile, tax relief for small businesses would have a major impact on their profit margins,” explained Seetharam.
Other key points he expects to be addressed are that of plans around infrastructure investment, higher youth unemployment, electricity tariff increases and updates on the implementation of the National Development Plan (NDP) directly affecting SMEs.
Ben Bierman, chief financial officer at Business Partners Limited also commented on the expected plan implementation around SMEs. The list includes, “the slashing of red tape to ensure the remaining compliance rules are implemented efficiently, effectively and with quick turnaround times. The implementation of a routine small business impact assessment process to test any new legislation and regulation for its unintended consequences and compliance burden on owner-managed businesses.
Expectations for tax concessions and a more collaborative effect between labour, big business and small business."
Under pressure
The pressure on Gordhan is immense, as not only South Africans at large but credit rating agencies like Moody’s, Standard & Poor’s and Fitch, look on in the hope that concrete plans will be implemented to reassure local and foreign investors.
Eric Enslin, CEO of FNB Private Wealth and RMB Private Bank, pointed out that although factors outside of our control have influenced the current economic fortunes. These include the poor performing Chinese economy, strong US dollar and poor GDP growth rate, amongst others, we as South Africa need to urgently take control of those factors we can control, in proving to investors that SA is a destination ‘worthy of investment.’
Talk has also focused around Zuma’s announcement that recommends the restructuring of state-owned enterprises (SOEs).
“In response to pressure on government from business and rating agencies, Zuma has since released a report that recommends a shake-up of SA’s state-owned enterprises (SOEs), including a partial listing of some and the privatisation of others.
“The report recommends encouraging and expanding private sector participation through partnering with SOEs to deliver on economic and social infrastructure plans. In addition, an inter-ministerial committee is currently investigating how to instil good corporate governance across SA’s SOEs and prevent the practice of awarding contracts on the basis of political connections,” reported Fin24.
Wealth management services company, Nomura, believes SOE’s will get a mention. “We expect detailed reporting on the increases to wider public sector contingent liabilities and guarantees, especially on SAA, which may well make for uncomfortable reading for markets, though we expect no new guarantees to be offered. There is likely to be detail on better parastatal management and more opportunities for PPPs with the private sector. We expect no mention of privatisations.”
Opposition expectations
This week the Democratic Alliance (DA), said there would be a number of issues that Gordhan would need to address. These included, high levels of unemployment, avoiding a sovereign ratings downgrade, providing relief to poor households, dealing with the student fees crisis and providing drought relief.
DA Shadow Minister of Finance, David Maynier and DA Shadow Deputy Minister of Finance, Alf Lees, believe that the following will be looked at:
-High levels of employment: “We believe the Minister should review the implementation of the Employment Tax Incentive and allocate funding to provide for the rollover of the Employment Tax Incentive.”
-Ratings downgrade: “We believe the Minister should pursue aggressive fiscal consolidation.”
-Housing relief: “We believe the Minister should provide social grant beneficiaries with an above inflation-related increase in 2016/17.”
-Student fees: “There needs to be additional funding for students who qualify for funding through the National Student Financial Aid Scheme.
"Increases in university subsidies to prevent the need for above-inflation fee increases and to provide for investment in faculty, equipment and infrastructure to support students. In addition the minister needs to call on the private sector to assist to overhaul the funding model and debt-collection system.”
-Drought crisis: Additional funding needs to be made available for loans and grants for farmers and workers.
“However, to get the economics right, the minister will have to get the politics right,” said Maynier and Lees.
*The Freedom Front Plus and the Economic Freedom Fighters, did not respond to request for comment at the time of publication.