Manuel may have good news on funds

2002-02-15 22:37

Jaco Leuvennink

Johannesburg - There are strong indications that Trevor Manuel will amend his Budget speech for Wednesday at the last minute in order to announce a cut in the 25% tax rate on pension funds' interest, rental and foreign dividend income.

This will be very good news for millions of South Africans. The government earns about R7 billion from this tax, which was introduced two years ago.

Advocate Abri Meiring, a business environment manager and tax expert from Old Mutual, says this tax is an even greater mistake in the South African tax system than capital gains tax.

Whether Manuel will go so far as to scrap the tax completely before the promised revision of tax on retirement savings is to be doubted.

But already a cut in the rate to 18% will put about R2 billion back into the retirement savings of South Africans - notorious for their poor efforts at personal saving.

Further good news for South Africans is that, largely as a result of more efficient tax collection by the South African Revenue Service, Manuel will have - according to some sources - as much as R15 billion of additional income at his disposal.

So a more generous hand with poverty relief and the stimulation of economic growth by tax relief and greater expenditure on infrastructure development may be features of this year's Budget.

The Budget is not likely to produce any further surprises, because the framework and policy pattern has already been sketched in the mid-term Budget policy statement, which is submitted annually in October by the Minister.

Manuel should have scope for both tax relief and greater State expenditure, whether as stimulation for the economy or better social, health and welfare services.

Already last year, Manuel put greater emphasis on a freer fiscal approach and the "fruits of saving", and he is likely to expand on that this year.

A possible surprise may be found in the precise nature of poverty relief. There have been increasing demands from trade unions, churches and aid organisations for the introduction of a basic income grant.

But it looks more likely that Manuel's freer hand will be aimed instead at making more money available for public job creation programmes and the already announced higher than inflation increase in social pensions and child allowances.

Spending on welfare and other social services, the security services, infrastructure development and other economic stimulation measures will also benefit from this.

Manuel will certainly not only be giving, and the usual increases in 'sin tax' (on tobacco and alcohol) and the fuel levy will probably be announced again.

As for income tax relief, the lower income groups will be given preference.

Manuel would like to reduce the gap between the 42% marginal personal income tax rate and the 30% company tax rate (about 37.5% more if the 12.5% secondary tax on companies is included).

Some analysts therefore think he may reduce the marginal rate for individuals to 40% and at the same time reduce the secondary tax on companies to 10%.

This will make the company tax rate more competitive, but at the same time reduce the gap with the personal tax rate. Requests have been made for a reduction in the value added tax rate (VAT) because it will counter inflation, and will assist consumer spending and therefore growth and will help the poor relatively more. But it is unlikely anything will be done to this rate.

The government knows it will be extremely difficult to increase VAT again once it has been lowered.

It will also be interesting to see the government's latest views on the effect of the depreciation of the rand on inflation targets, growth expectations and other economic indicators.

- Sake