Budget 2018: Ratings agencies to keep an eye on 'excessive' tax hikes

Cape Town – Ratings agencies will also be looking out for excessive tax hikes in Budget 2018 which could “strangle” economic growth, said an analyst.

Now that Cyril Ramaphosa has been elected president, all eyes will turn to the budget, which will be delivered by the finance minister on Wednesday, February 21. There is currently speculation that Ramaphosa may have a Cabinet reshuffle over the weekend, with several ministers’ jobs on the line, including that of current Finance Minister Malusi Gigaba.

Rand Merchant Bank’s currency economist John Cairns, however, said that the content of the budget will be more important than the person delivering the speech.

In a market report, Investec Chief Economist Annabel Bishop explained that ratings agencies and the markets will be concerned about the severity of the deficit and future debt projections.

“But just as much as the rating agencies are watching for fiscal consolidation, so they are watching for the avoidance of excessive indirect and direct tax hikes that would strangle economic growth,” she said.

Economic growth is projected to be 1.5% in 2018. However, there is a risk that growth could fall back to 0.3%, as it was in 2016, if tax hikes stall private sector spending, she explained.

South Africa’s weak economic growth, and poor GDP per capita performance is just as important to ratings agencies as the status of the country’s debt, she highlighted.

“Despite some political change and perceived improved governance at Eskom, little further tangible progress has  occurred as yet to avoid junk status from Moody’s,” said Bishop.

Moody’s is expected to deliver the outcomes of its downgrade review in March. The 2017 mini budget did little to settle fears of fiscal slippage. “Consequently, the budget will be scrutinised for cost savings, improved economic-growth-led revenue forecasts and lower borrowings.”

Tax hikes

Bishop expects a rise in taxes for the wealthy, these being capital gains tax and estate taxes.  

Sin taxes on alcohol and tobacco are also expected to rise, as is fuel taxes. “VAT on fuel has been discussed, which could add a substantial amount to tax revenues, but would increase the tax burden across all income bands, but particularly for the poor whose expenditure on travel already makes up a very large part of their monthly expenditure,” said Bishop.

As for taxes for higher income earners, the top tax bracket of 45% for annual incomes above R1.5m can be raised to 46%. Or this bracket can be replaced with another bracket starting at R2.5m per year with a new top marginal rate, she explained.

“Corporate tax rates are not expected to rise as they are already high, but then so are personal income taxes compared to many other peer economies,” said Bishop.

Bishop is expecting a budget which is “tight and tough”, but one with an improved economic growth outlook. Free market reforms could support improved investor sentiment, and this in turn will translate into faster economic growth, she said.

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