In gloomier times, tax hikes can’t be put off for ever

2014-02-27 00:00

IN Budget 2013, the focus was tightening fiscal discipline and shifting money into infrastructure development. That Budget was delivered in a tough economic environment, but with some promise.

The same can’t be said today.

The outlook for the global economy in 2013 was initially positive. There was better stability in Europe, China appeared to continue growing rapidly and better U.S. housing data suggested its economy was picking up. Sub-Saharan African countries were growing strongly.

But China’s growth and the U.S. data slowed. South Africa came from 14 consecutive quarters of positive growth after the 2008/2009 recession. But as the year ticked on, the outlook grew murkier.

Increases for energy, transport, education, health and water eroded already indebted consumer activity further.

A rise in strikes, lack of transport and energy infrastructure, electricity disruptions and weakening global economic conditions deterred the corporate sector and foreign investors from ploughing money into expansion and creating jobs.

It meant the economic growth (GDP) outlook for 2014 was cut to 3,5% from 3,8% forecast in 2012.

Mazars tax head Mike Teuchert said, in a defence against additional taxation for high-income earners, that the economy is still being affected by the global climate, inflation continues to rise and the government is hard-pressed to raise revenue for service delivery demands.

Deloitte senior consultant Jef Jacobs said SA found itself on the wrong end of the emerging market spectrum in 2013 — classed among the “fragile five” with Brazil, India, Indonesia and Turkey, vulnerable because they face high budget and current account deficits, and are prone to currency volatility.

The rand depreciated 23% against the dollar over 2013, and if the currency weakness persists, will drive up inflation and further increase the value and service costs of foreign currency-denominated debt. Fortunately, this is still only about five percent of total net loan debt.

Exports, which should help reduce current account deficits by benefiting from a weaker rand, still depend on growth rates from developed economies, which are not expected to rebound soon.

“Treasury’s expectation of 2,1% GDP growth in 2013, and three percent in 2014, is higher than what has been suggested by market analysts,” Jacobs said.

There have already been two petrol price increases and an interest rate hike this year, and more of both are expected.

Tax expert Ettiene Retief said the causes of the current economic situation are complex.

The country’s income has reduced due to increased inflation, decreased foreign stimulis, trade deficits, and the weakening currency. This results in lower consumer spending, leading to reduced VAT income, and reduced production, leading to job losses and labour unrest.

“We have recently seen record levels of retrenchments and job losses, a standstill in platinum production, although South Africa is responsible for 77% of the global platinum production, and a construction industry that is still only managing to stay afloat,” said Retief.

“South Africans must face the harsh reality that taxes will sooner or later have to be increased, because the country can’t borrow much more without further negative impact,” said Retief.

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