Taxes may rise for wealthy in mini budget, says expert

Johannesburg – National Treasury may take a “tax heavy” approach to the budget, said Lesiba Mothata, chief economist at Investment Solutions.

Speaking to Fin24 by phone, Mothata shared expectations for tax revenues ahead of the medium-term budget policy statement - also referred to as the mini budget - to be presented by Finance Minister Pravin Gordhan on Wednesday, October 26.

“Coming from a ‘tax light’ budget in February, we are heading for tax heavy outcomes in the medium term,” he said.

A higher personal income tax bracket may be introduced. A wealth tax may be introduced as well, he said.

Higher corporate taxes are also possible following discussions at the G20 and authorities' plans to clamp down on tax evasion and tax havens.

Overall, the aim is to shift tax benefits to those who earn less, explained Mothata. Essentially inflation will be covered by tax paid by middle to higher income earners, shifting tax benefits to those who earn less income.

Mothata added that inflation could come down to below 5% in the middle of 2017. In the third quarter of 2016, rental inflation had come down to 6.1%. However, food price inflation was high, mainly driven by statistical patterns.

With improved rainfall following the drought, farmers may have a “bumper crop” in the next harvest.

“We could stop importing white and yellow maize as soon as the second quarter of 2017,” he said.

Raising revenue

Some of the tax increases introduced in the national budget in February may be evaluated.

“We will probably see if the taxes introduced had any material impact in raising revenue,” he said.

This includes levies on fuel and capital gains tax.

According to a report on the mini budget outlook by Momentum Investments (MMI), low GDP growth will impact government’s ability to meet revenue targets.

Government expenditure further appears to exceed revenue. Revenue growth averaged 7.8% year-on-year during the first five months of the financial year 2016/17. The February 2016 target was set at 8.3%. Expenditure growth averaged 6.5% year-on-year during the same period. This is greater than the target of 6%.

Key government revenue projections (% y/y)

Personal income tax, corporate tax and value-added tax (VAT) have under-performed estimates set in February. There has been a slowdown in retail sales which impacted VAT revenue, explained Mothata.

VAT only increased at an average of 3.6% year-on-year between April and August.

Key government projections (% y/y)

Mothata said it is unlikely the VAT rate would be raised from 14%.

“It is a policy lever not be tampered with and it will not be popular with households in a tumultuous political construct.”

Higher food inflation, increased debt burdens, stringent credit criteria and poor job prospects will impact Treasury’s expectations for growth in VAT collections, stated the MMI report.

There may be an uptick in corporate tax collections. Strong export demands result in greater corporate profit and higher tax revenues, explained Mothata.

“An uptick in business confidence levels in the third quarter paints a similar picture of the health of South African corporates,” stated MMI. 

* Visit our Budget Special for all the budget news and in-depth analysis.

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