Finance minister Pravin Gordhan faces the most formidable task of his political career when he presents his Budget for 2017 next week, as he must squeeze an additional R28bn of tax revenue out of the flagging economy while simultaneously boosting its pace of growth and job creation.
Gordhan also has to meet the tough debt and budget deficit targets he set last October in order to steer South Africa clear of the credit rating downgrades which it narrowly managed to avoid last year, averting a steep jump in the government’s cost of borrowing and an outflow of foreign capital.
He must meet a pledge to slash spending by R20bn this year, without affecting the social spending that now helps to support 17m people.
If revenues fall short of Treasury’s mid-term budget projections in October, taxes may have to rise even further.
This all takes place in a precarious political environment, with different factions of the ANC jostling for power ahead of the party’s elective conference in December. The global backdrop is not ideal either because of the lack of clarity around the impact of US President Donald Trump’s policies, which look set to disrupt long-standing trade agreements.
Rumours of an imminent Cabinet reshuffle, which could include Gordhan’s removal from office, have raised the stakes, as this would spook domestic financial markets and create perceptions that Treasury’s sound economic policies are in jeopardy.
Budget strategy likely to meet aims
Nonetheless, the prevailing view is that Gordhan and his team at Treasury will set out a strategy that will meet all the requirements, at least for the time being. “We are in a low-growth economy but that does not mean we are trapped in it,” says Sizwe Nxedlana, chief economist at FNB.
“I think if Treasury sticks to what it says and broadly speaking there is no fiscal slippage or political mishap, economic growth will be better than last year and the chances of avoiding a downgrade are very high.”
The International Monetary Fund (IMF) has predicted that the economy narrowly avoided a recession last year with growth of just 0.1%, and that the pace will pick up to a meagre 0.8% this year. This scenario is gloomier than the one painted by independent forecasts, which put growth last year at just below 0.5%, quickening to around 1% this year.
Only a modest acceleration is expected over the next two years, which will make little inroads into an unemployment rate hovering at around 26.5%.
“My view is that over the years the budget has become less and less flexible as fiscal parameters deteriorated. We are now at a point where we have less flexibility than there has been for decades,” says Stanlib chief economist Kevin Lings.
Tax hikes must not stifle economy
The key question is what taxes can be raised without damaging fragile business and consumer confidence, which both fell in the final quarter of last year. Private investment contracted for the fourth quarter in a row.
Lifting the value added tax (VAT) rate by one percentage point to 15% would be one of the most effective steps to take, as it should boost tax revenue by between R15bn and R20bn. It would also make sense as SA’s VAT rate is low by global standards – the average rate in Africa is 16%, and the level was last raised in 1993.
But this is unlikely to happen as it would take a heavy toll on the country’s poor majority without adjustments to offset the impact through increases in social grants or more exemptions on certain products, which would complicate administration of the tax. Politically, it is a hot potato.
“What Gordhan is left with is a solution whereby a selection of smaller taxes are cobbled together to raise the needed R28bn,” says Nazmeera Moola, co-head of fixed income at Investec Asset Management.
High-income earners may be targeted
Speculation is rife that high income earners will bear the brunt of likely measures to raise personal income tax (PIT), which generates more than a third of total tax revenue, making it the largest contributor to official coffers.
Increasing the marginal tax rate on the top tax bracket to 45% from 41% now could yield between R7.5bn and R10bn, according to Muziwethu Mathema, senior economist for KPMG in South Africa.
PwC’s tax policy head in SA, Kyle Mandy, predicts a one percentage point increase in all tax brackets except the lowest, which would yield R10bn.
Nazrien Kader, head of taxation services at Deloitte Africa, believes that it is also conceivable that a special levy or surcharge may be applied to individuals with earnings above a set threshold until the economy strengthens – being temporary, it would be more palatable.
But raising taxes on high-income earners could be very risky. According to last year’s budget document, there are only 7.1m taxpayers. Of these, less than 1m have an annual salary above R500 000, and they already account for more than 60% of the total PIT intake.
There has also been talk of introducing a new tax bracket for people earning more than R1.5m, but as Moola points out, this would not raise meaningful revenue.
The problem is that squeezing more money out of these people could prompt “aggressive” tax planning. As they are generally highly skilled and mobile, the step could persuade many to leave the country for places where PIT levels are lower.
Mixture of tax measures
However, Treasury is very likely to avoid adjusting tax brackets for inflation, which could yield as much as R13.5bn, according to Kader. Last year, this step was taken for higher brackets and resulted in a net tax increase of R7.6bn.
Almost equally certain are changes in tax policy around trusts, estate duty, and donations between spouses – all other forms of wealth tax that could raise between R3bn and R5bn per year. There’s also definitely money in the pipeline from a “voluntary disclosure” programme on overseas assets, which runs until the end of August. The last amnesty in 2004 raised R2.9bn.
Corporate income tax will almost certainly not be increased as the economy is so weak, and at 28% it is already steep by international standards. The step would erode SA’s competitiveness and ability to attract investment, Moola says. In addition, corporate revenue is also concentrated, with just 325 companies contributing 58% of tax collection.
Treasury announced last year it would introduce a tax on sugar-sweetened beverages on 1 April in a bid to improve the population’s health through curbing the consumption of sugar. This could yield R4bn in revenue annually, but as Deloitte points out, for the tax to be a credible health initiative, this money should be channelled into programmes to raise awareness about high sugar consumption and other lifestyle issues which contribute to obesity.
The Beverages Association of South Africa has warned that the tax could cost the economy R14bn and trigger job losses of between 62 000 and 72 000. But if the tax does go ahead this year, it will still take several months to finalise governing rules and licensing applications.
A carbon tax has been on the table since 2010, but has been postponed several times and is now scheduled for implementation in 2018. Despite objections from industry, there is little doubt that it will eventually go ahead, given government’s intention of complying with global climate agreements.
Despite higher global oil prices, analysts believe that the fuel levy will be raised once again, as this would be more palatable than an increase in VAT. Depending on the increase, this could raise between R5bn and R7bn.
“Sin” taxes on products like wine, spirits and tobacco products will undoubtedly rise once again, and could generate between R5bn and R7bn. However, KPMG warns that “disproportionate” increases could eventually encourage black market consumption.
Elephant in the room
The elephant in the room is the message which President Jacob Zuma sent earlier this month in his State of the Nation Address on the need for “radical” economic policy to further diversify the economy and address persistent income and ownership disparities between black and white South Africans.
But as Nxedlana points out, most of the policies which he highlighted are already in place, and are viewed by business as positive for the economy. “Using the government goods and services budget of R500bn to support social justice initiatives is not radical,” he said.
“No-one disagrees with supporting new entrants, small business and people of colour. Accelerating diversification and increasing competition in the economy is a win-win for everyone.”
Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.
This article originally appeared in the 23 February edition of finweek. Buy and download the magazine here.