The Budget Speech will unfold against a backdrop of major political and economic challenges. The commodity collapse, drought, a falling rand, the Nkandla “about-turn”, the finance minister debacle, a mysterious on-again / off-again nuclear deal and student riots are but a few of the absurd goings-on recently. All of these issues are leading South Africa to the prospect of an imminent ratings downgrade whilst government expenditure continues to rise and a new national health scheme is surprisingly still on the cards.
It’s within this environment that Finance Minister Pravin Gordhan will deliver his speech at 2pm on February 24. Given the perilous state of the rand, weakening economy and unpredictable shenanigans, everyone is asking if the budget will steer the country in the right direction - or launch it straight past the bizarre, to the completely ridiculous.
“Before discussing what we can expect from the Minister, we need to paint a picture of SA right now,” says Eugene du Plessis, Director and Leader: Tax at Grant Thornton. “Cutting government expenditure and restoring key parastatals to profitability whilst raising revenue to balance the budget, is the key.”
The Nkandla saga tops the pile. President Jacob Zuma initially defied the findings of the Public Protector that he should pay back a reasonable portion of the money. Then, police Minister Nathi Nhleko went to great lengths to defend the president. And suddenly, just before the State of the Nation Address (SONA,) President Zuma completely surprised the nation, offering to “pay back the money.”
Since last week the EFF has focused attention on the powerful Gupta family and how prominently it features in the SA landscape.
There also seems to be no clear direction for the state-owned entities characterised by internal disputes and dismal financial performance.
“The Finance Minister fiasco – and its hugely negative impact – was probably the most bizarre recent occurrence, and one which has still not been fully explained,” says du Plessis.
“The reappointment of Pravin Gordhan has provided some stability, but the rand remains in a perilous state.”
It is within this confusing milieu that SA’s new (and previous) Finance Minister, will deliver his all-important National Budget Speech. Gordhan will be closely watched as he tries to stabilise the SA ship.
More tax hikes for high nett worth income earners
“Revenues will come in under projected targets, given our poor economic growth, and the minister will no doubt impose some form of incremental tax increases targeted at high nett worth individuals,” says du Plessis. “These may take the form of increased marginal tax rates for individuals and trusts, higher capital gains tax (CGT) rates or special wealth taxes.”
“The worst thing Gordhan could do, however, would be to scare off the main drivers of our economy,” warns du Plessis. “If he overburdens those from whom the majority of tax is collected, he runs the risk of losing them.”
“This strategy may result in short-term gains in the form of higher tax collection, but making the country less attractive for income-earning, tax paying citizens and prospective investors does not make sense in the long run.”
“We desperately need investment as well as other measures to stimulate the economy and cannot afford to chase away the people who are the biggest contributors to tax collections and economic activity,” says du Plessis. “Many higher-earning tax payers have the means to take money offshore or leave the country – and will do so if they are overburdened.”
“Furthermore, wealth taxes will not contribute significantly to the coffers as government won’t be able to collect the billions needed to stimulate the economy in this way.”
Judge Dennis Davis, head of the Davis Tax Committee set up to re-examine the country’s tax system, has himself warned of a ‘tax revolt’ in a media article during November 2015, if the government does not spend the taxes collected appropriately. “The greater the level of corruption, the less we will have tax integrity and the greater the possibility of a tax revolt,” warned the judge.
VAT rate will probably remain unchanged – Du Plessis
Gordhan is unlikely to meddle with the 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.
“There is a chance the minister may introduce a dual VAT system, but this would require special legislation and the introduction of new systems, so it seems unlikely,” says du Plessis.
Cost containment and possible increases
There will no doubt be emphasis on further cost-containment, curbing tax evasion and as well as further implementation of the base erosion and profit shifting (BEPS) programmes, in line with worldwide focus.
There are likely to be increases in personal tax rates, as well as changes to estate duty laws and CGT.
In a country in which there are bizarre discrepancies – where a 25% share in a buffalo bull recently sold for R44m and R246m was spent on upgrading security for a private homestead while millions of South African people are unemployed – Gordhan faces an unenviable task next Wednesday.
“Let’s hope the minister’s speech is slanted towards workable long-term strategies rather than short-term gains that will simply reinforce the current situation,” says du Plessis.