Budget 2023
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Taxpayers in for added squeezing - analyst

Cape Town - Taxpayers must prepare to further tighten their belts following the first mini budget (Medium Term Budget Policy Statement) from Finance Minister Nhlanhla Nene on Wednesday.

"While there could be some feedback from the Davies tax committee on Wednesday, actual changes to tax rates are unlikely to be announced during the midterm budget. However, there is no question that taxpayers are in for some additional squeezing in coming months," according to Izak Odendaal, investment analyst at Old Mutual Wealth.

“The minister will have little option but to announce some bad news for taxpayers, whether it be this week or in February."

Next year promises tighter fiscal and monetary policy, higher electricity tariffs and sustained inflation of between 5% and 6%, according to Odendaal.

“The assumption that the economy will improve on 2014’s dismal performance rests almost entirely on an export recovery,” he said.

“Longer-term, the economy needs structural reforms along the lines identified by the National Development Plan (NDP), and specifically, a more flexible labour market, the professionalisation of the civil service, improved educational quality, and sustained infrastructure investment," according to Odendaal.

“The danger is that government could cherry-pick the ‘easy’ but expensive recommendations of the NDP, while ignoring the politically difficult, but vital parts. Either way, the ‘fiscal space’, as former Finance Minister Trevor Manuel used to call it, has closed."

Tax changes

Tax changes appearing to be on the cards in the mini budget, include Value Added Tax (VAT) exemptions which may be eliminated.

Currently, a range of fresh food items are VAT free, benefiting rich and poor alike. The blow to poorer households from this change could potentially be offset by increased social grant payments.

“Increased marginal tax rates for high income earners, or another form of wealth tax, are also a possibility. This will probably be more for symbolic than fiscal reasons, as high income earners are already stringently taxed. So, there is little extra revenue government can squeeze out of them," said Odendaal.

“Finally, closing any remaining loopholes and tax avoidance schemes are likely to be on the cards. Particularly the practice by some companies of ‘offshoring’ some of their tax liabilities.”

Four broad budget themes

Odendaal says there are four broad themes that will form the backdrop to this year’s mini budget.

No shortage of spending needs

As always, the government has an extensive list of pressing areas requiring spending, including desperately-needed infrastructure upgrades, poverty relief and the daily requirements of education, health and safety, according to Odendaal.

But this year, other spending requirements also need to be addressed.

“The size of the government’s wage bill is of particular interest, as it is such a politically sensitive area. Public sector unions have asked for 15% salary increases from next year, but the minister has said increases greater than inflation plus 1% would lead to job losses,” said Odendaal.

Another urgent matter on the mini budget agenda is Eskom‘s recapitalisation, which might be funded from the sale of “non-strategic” assets. This announcement will be keenly anticipated.

“Since government has committed to a ceiling above which spending may not rise over the medium term, it becomes a matter of trade-offs between different spending priorities, both current and future. Implementation of the National Health Insurance programme might, for instance, be pushed out," said Odendaal.

“Of course, while there is massive room for improvement in curtailing wasteful, unnecessary and fraudulent spending, that will not by itself close the budget deficit.”

Slow growth bad for tax revenues

To grow its tax take, government relies on economic growth, yet economic growth has been most disappointing, according to Odendaal.

At the time of the February budget speech, the National Treasury was expecting the economy to grow by 2.7% in real terms this year and 3.2% in 2015.

"However, with protracted strikes, sluggish global growth and a squeeze on household incomes, the economy has faltered this year. Currently, The International Monetary Fund (IMF) expects growth of only 1.4% this year and 2.4% in 2015, while the SA Reserve Bank’s most recent forecasts were for 1.5% and 2.7% respectively,” he said.

At the time of the February budget speech, tax revenue was expected to increase by 8.6% compared to the previous year.

Yet, five months into the current fiscal year, tax revenue is only growing by 6.9% compared to the same period last year. Tax revenue projections for the following two fiscal years - 9.9% and 10.3% respectively - now seem very ambitious.

"Meanwhile, expenditure growth is running ahead of budget, which means the budget deficit is growing, rather than shrinking, which should be raising the alarm bells,” said Odendaal.

Large deficits no longer acceptable

Markets are no longer happy with large deficits, according to Odendaal.

As recently as four years ago, South Africa’s budget deficit was considered to be manageable by global standards. In 2010, following the collapse in tax revenue due to the recession, the US deficit was 9% of gross domestic product (GDP) and the UK’s at 8%. South Africa’s was only 4.5% of GDP.

But since then, South Africa’s deficit has remained broadly the same around 4% of GDP, while the other major deficit countries have made substantial progress. The US deficit will be smaller than 3% this year.

"South Africa had its rating downgraded by Standard & Poor’s this year, but even compared to our new BBB-rated peer group, the size of our budget deficit is starting to stand out," warned Odendaal.

“In other words, the global climate is less forgiving of our problems than it was a few years ago. The same is true for our massive current account deficit, but that lies outside the direct control of the finance minister.”

Odendaal points out government is well aware of the need to close the deficit and the February budget speech included plans to this effect.

“But it has already fallen behind in those plans and a capital injection for Eskom could put deficit reduction further behind target. This significantly increases the pressure on the finance minister,” said Odendaal.

Global liquidity and commodity drivers

Over the past few years, South Africa benefited from two big trends that now appear to be reversing.

“Firstly, the country received massive foreign capital inflows as global investors searched for higher yielding investments. With US interest rates set to increase next year, the global liquidity environment could become complicated - we have already experienced a taste of this with the surging US dollar over the past two months," said Odendaal.

“This could raise borrowing costs for all local borrowers, including the South African government, which borrows around R160bn per year. With interest payments the fastest growing item in the budget - and not far from over-taking welfare spending - we cannot really afford to borrow or roll-over debt at higher yields.”

The other major trend that has turned against SA is that global commodity prices are falling as Chinese demand for commodities has softened, while global supply is increasing as a result of the high real commodity prices of the past decade.

"This complicates SA's ability to export our way out of weak domestic demand. Lower commodity prices also limits government’s tax take from the mining sector,” he explained.

- Fin24

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