Budget 2015: Nene has a bad story to tell

2015-02-25 19:00

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Finance Minister Nhlanhla Nene had a pretty horrible story to tell today. The government missed its tax targets by more than anticipated and now South Africa is in for a double dose of both higher taxes and lower-than-expected state spending.

Although there are income tax hikes on the cards, it will mostly hit the rich — the rest of us could actually pay less.

Unfortunately, we’d have to use that windfall to pay for simultaneous hikes in taxes on electricity, petrol and of course cigarettes and alcohol – which hit the poor more.

Keeping the tax system progressive is an overarching concern, said Nene.

» The basics

Last year, Pravin Gordhan set a tax revenue target of R993.7 billion in the financial year to the end of March. What his successor Nhlanhla Nene ended up with was R979 billion. That’s R14.7 billion short. There is a “structural gap” between what government needs and what it gets, said Nene in his maiden budget speech today.

Addressing journalists a few hours before the speech, he emphasised that government debt is growing faster than hoped. By 2016, interest payments will outstrip social grants. Here’s what he wants to do about it and how it affects you:

» If you pay income tax

Nene is promising everyone earning less than R450 000 a year, which in South Africa is more than 90% of the working population, an effective tax cut. The top 1 million taxpayers, who already pay more than 60% of income tax, will pay more.

The plan is to increase the tax rate for everyone by 1 percentage point while tax credits on medical scheme contributions and adjustments to the tax brackets effectively lead to lower tax. If you have taxable income of R100 000 a year, you end up paying R531 less in tax.

If you earn R1 million a year, you pay R4550 more. It’s not going to change anyone’s life dramatically if they are earning more than R181 900 a year. According to Nene, this will actually only hit people earning more than R450 000. One percent is a “very small amount”, said Nene.

“We can do that without inflicting too much damage.”

There has been speculation that South Africa would raise its VAT rate from 14% to 15%, but Nene said that the treasury was waiting for the Davis Commission to conclude its work on that and other possibilities.

» If you receive a social grant, you are now poorer

The annual increase in social grant values is low this year and will not make up for inflation since February last year. All the major grants, including the old-age and child-care grants, will increase by only 4.4%.

Although the treasury says that this beats its inflation prediction of 4.1% this year, that is not particularly helpful for the more than 3 million old-age grant or 12 million child-care grant beneficiaries, who have seen their buying power eroded. The increase will be reviewed in October in case inflation picks up again.

The old age grant goes up from R1350 to R1410 a month. The child care grant goes up from R315 to R330 a month.

The treasury expects to spend about R130 billion on grants this year, up from R120 billion.

» If you drive a car – hope you enjoyed the lower fuel price

All over the world governments are wondering what to do with the windfall of the low oil prices. The International Monetary Fund is telling everyone that this is the time to stop energy subsidies without causing riots. Nene is exploiting the oil prices by raising both the general fuel levy and the road accident fund (RAF) levy. That makes taxes shoot up from about 28% of the fuel price – to more than 40%.

At the moment every litre of petrol includes R2.25 for the levy and R1.04 for the RAF. That is about to become R2.55 and R1.54. For diesel the levy jump is from R2.10 to R2.40.

The treasury thinks this will give it an extra R6.5 billion.

This extra 80c tax on every litre of fuel “could have gone higher”, says Nene. “We constrained ourselves.”

» If you are a crooked lawyer

The biggest part of the levy is meant to save the Road Accident Fund, which has spiralling liabilities due to the large-scale exploitation of it by damage-claiming lawyers who are able to load their fees on to clients’ actual claims.

Despite the higher levy, the RAF system is doomed, said the treasury. The fund’s liabilities are escalating and its net asset value will be minus R140 billion by 2018.

This is not money for victims, but for lawyers, said Nene. The plan is to replace the RAF with a new no-fault system involving no lawyers at all. A bill to do this will be produced this year.

» If you are Eskom

Nene didn’t reveal any new details around the planned bailout of Eskom. He did say that the “leveraging of resources” to provide a R23 billion injection to the struggling power behemoth is at an “advanced stage”.

Eskom will receive R10 billion around June and the rest by the end of the year. The money is supposed to come from an as yet unidentified non-core asset, leading to wild speculation about potential privatisations or divestments.

“I know you are all eager to know which asset it is, but we won’t say until it is sold,” said Nene.

» If you are everyone else beholden to Eskom

The tax on electricity is going up “temporarily”. Since 2010 there has been a levy of 3.5c on every kwh of electricity sold. That will go up to 5.5c until the carbon tax kicks in in 2016.

The good news is that the extra revenue will be used to fund bigger incentives for energy efficiency.

» If you are a big power user (especially BHP Billiton)

Eskom has been suffering losses for years related to its long-term and secretive contract with mining giant BHP Billiton to provide its aluminium smelters with cut-price power.

The treasury is taking a not-so-subtle swipe at the company, which has been largely immune to the power price hikes of the past few years.

Apart from the higher levy on power, “the government is examining loopholes that unduly favour intensive electricity users”.

While that seems to include most large users like mines and steel mills, the budget review adds that actually it will only apply to users paying less than 37c per kwh. Then it also adds that it has “exporters” of power in mind.

Lungisa Fuzile, director general of the national treasury, strongly hinted that they were targeting large users that do not respond to higher prices. Put together, these hints leave little doubt that the treasury is trying to tax Billiton because Eskom cannot legally raise the company’s power tariffs.

» If you work for the government

It isn’t the budget speech without some tough talk about the ever-growing wage bill.

Public sector wage talks are ongoing, so Nene spoke carefully. He hopes there will be a “reasonable” settlement that doesn’t make too big a mockery of the budgeted increase of 6.6%. When wages overtake the cost of goods and services, it is a “sad situation”, said Nene. The answer: moderate headcount growth.

» If you are a member of Parliament, get ready for work

A number of massively important new laws are due to land in Parliament this year, according to the budget. A bill of financing the National Health Insurance (NHI) scheme is due this year. So is a bill on the long-overdue reform of South Africa’s social security and pension system. The sure-to-be contentious Carbon Tax Bill is coming this year, among others.

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