Get Answers To Any Compliance Questions: --- Chat Directly To A Partner

Categories: Tax


Article © CA(SA)DotNews by DotNews

Basket Squeeze“Without economic growth, revenue will not increase. Without revenue growth, expenditure cannot increase” (Finance Minister Nene in his Medium Term Budget Policy Statement (MTBPS), October 2015)

These words spoken by Minister Nene neatly capture the predicament the country’s finances are in. Several years ago growth exceeded 5% and the budget showed a small surplus. Today we are growing at just over 1% and without ongoing growth in government revenue we will struggle to continue with the government’s ambitious development policy.

In addition, national debt has been rising over this period from around 30% of GDP in 2010 and Minister Nene is predicting this will reach 45.7% in 2019/2020.  Interest on the debt is now the fastest growing item of government expenditure.

Salaries consume nearly 50% of State expenditure which does not leave space to fund welfare or infrastructure spend. Government salary increases were over budget and will eat up an additional R64 billion in expenditure over the next three years. Effectively, this wipes out the State’s contingency reserve. This comes at a bad time when funds will have to be found to cover drought relief and the freeze in university fees in 2016.  The Minister also announced that revenue will be R35 billion short over this period.

Fiscal consolidation

The Minister had little option but to emphasise discipline.  He acknowledged that the overspend in salaries will limit government choices in responding to additional spending needs (such as the need now to find nearly R3 billion to cover the no fee increase for universities).  He did announce some action on spending controls:

  • In future proposed legislation and regulations would be subject to a socioeconomic impact study,
  • The ceiling of real government expenditure increases of 1.6% imposed in 2012 will continue.

On the revenue side, Minister Nene announced that a Carbon Tax will be introduced and a draft would be sent out for comment (this has been circulated). The Davis Tax Committee has been requested to consider a wealth tax and the Minister is considering an increase in VAT.  In the current socioeconomic environment, a VAT rise is considered extremely unlikely.

The real issue on the revenue side is the low growth position the country has entered. Growth is forecast at 1.5% this year, rising to 2.8% in 2018. This low growth outlook reduces the prospect for significant revenue increases. There is significant risk that even this growth forecast will not be met. Thus, reducing unemployment and poverty become harder to achieve.

But still…   

In spite of the difficulties facing the country, the budget deficit to GDP will reduce to 3.2% in 2018 and government debt is stabilising. The Minister has given a credible medium term outlook. The real test will be how the rating agencies see this – the next rating assessment is due in December.

Tax increases ahead

Finally, we should expect tax increases to fund the R36 billion revenue shortfall and if the Minister’s GDP growth forecasts aren’t met, the tax increases will mount. We can certainly expect some form of increased wealth tax (estate duty, capital gains tax) in next February’s budget.

Facebook Comments

Leave a Comment

Your email address will not be published. Required fields are marked by *.