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Cape Town - Any tax changes for which Minister of Finance Nhlanhla Nene continues to pave the way, will hopefully focus on indirect taxes rather than direct taxes, according to Arthur Kamp, investment economist at Sanlam Investments.
This is because, in his view, direct taxes discourage work, savings and investment. Indirect taxes could include carbon tax, a higher VAT rate, changes to estate duty and possibly the introduction of wealth taxes, along with a focus on reducing revenue loss through profit shifting and “misuse of transfer pricing”.
The slowdown in economic growth, combined with a higher than expected increase in government’s wage bill, continue to make it difficult for the National Treasury to balance the books, according to Kamp. This is despite the number of people employed on government’s payroll declining in recent years.
"Overall, weaker growth projections have lowered expected revenue collection by a cumulative R35bn over the next three fiscal years. Accordingly, the minister continues to pave the way to introduce higher tax rates or new taxes at some point," said Kamp.
An important factor from the mini budget for Kamp, is that National Treasury has kept support for Eskom and the Brics Development Bank “deficit neutral” by means of funding through the sale of state assets.
Although the mini budget shows that Treasury continues to stick closely to its previous expenditure projections in absolute terms - using its contingency reserve to absorb additional wage costs - the disappointment for Kamp is the significant slippage evident in spending relative to GDP.
Consolidated spending is projected to fall from 33.6% of GDP in 2015/16 (inflated by the special appropriations) to 32.5% in 2017/18 and 32.4% in 2018/19. This compares with the previous projection of 31.7% of GDP in 2017/18 published in the February 2015 Budget Review. This reflects lower income growth in the economy.
Treasury has proposed a long-term fiscal policy guideline which links expenditure and GDP, but for Kamp a spending level of 32.5% of GDP is disappointingly high.
Other than the poor performance of the economy, risks to the fiscal outlook include a lack of clarity over the funding of National Health Insurance and the performance of the State Owned Enterprises. Treasury has begun, however, to address risks evident in SOEs and the mini budget indicates pilot projects are under way at a number of entities.
For Kamp the mini budget clearly signals National Treasury's intent to stabilise the debt ratio, as shown by its willingness to raise taxes if needed. Kamp also regards Treasury's track record of maintaining its expenditure ceiling in recent years and good revenue collection as commendable, considering the state of real economic activity.
"However, while all of this is encouraging, it is also evident South Africa’s lower potential growth rate demands a renewed focus on expenditure restraint. Indeed, it seems fair to argue the current depressed level of growth cannot support the intended level of government spending," said Kamp.
"The Treasury’s proposed long-term fiscal policy guideline is an appropriate response. Now it needs to implement it. Until then, the jury is out on long-term fiscal sustainability."
