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Tax hikes are the chief channels the finance ministry has used to respond to the challenges faced by South Africa.
Debt accumulation, while the Treasury remains committed to keeping it within sustainable levels, has intensified with projections having deteriorated from the 2015 Budget estimates.
Economic growth forecasts have been revised downwards, while inflation expectations are materially higher. On the expenditure side, the public sector wage bill has been the main focus.
Higher taxes
Capital gains taxes have effectively been increased by two percentage points (from 14% to 16%) for individuals, four percentage points (from 19% to 22%) for companies and 6 percentage points for trusts.
In the real estate sector, transfer duties for home sales more than R10m have been increased by two percentage points (from 11% to 13%). In addition to these, the fuel levy has been increased by 30 cents a litre.
Two new taxes have been introduced for the first time in South Africa: a tyre levy to finance inter alia recycling programs and a tax on sugar-sweetened beverages. Effectively South Africans will pay a tax for buying car tyres and also for consuming beverages such as Coke.
Through its interaction within the G20 project on base erosion and profit shifting, the finance ministry is looking into ways to limit tax revenue loss from companies that evade tax through transfer pricing abuses, misuses of tax treaties and illegal money flows.
Perils of debt
Due to the depreciation of the rand and higher interest rates, debt-servicing costs have become the fastest growing item of expenditure and income.
In a nutshell, for every rand earned by the state, 12 cents is paid in as interest costs. At the same time, the total stock of government debt will exceed R2tr in the medium term.
In the previous Budget, the net debt-to-GDP ratio was forecast to stabilise around 44% in the next three years, but has subsequently been revised upwards to consolidate two percentage points higher at 46%.
The headline (or gross) government debt-to-GDP ratio, which is closely monitored by investors and ratings agencies, has increased to 51% from 49%. The deterioration in nominal GDP (denominator) has negatively contributed in the worsening ratios.
The portion of debt denominated in foreign currency remains low for SA at 10% of total debt.
The Treasury has showed that non-residents now hold 32% of SA debt which is a notable decline from the 36.4% peak in 2013. It appears foreign investors have sold SA bonds, especially during the latter part of 2015.
Expenditure consolidation
The Treasury has revised its expenditure ceiling lower in response to potentially weaker tax revenues in the future. It has also confirmed that the pace of hiring, especially at the provincial level, has slowed. However, the public sector wage bill remains elevated as the agreements on salary increases are negotiated for a three-year period.
South African runs a fully-funded pension system. The Government Employees Pension Fund (GEPF), with assets of around R1.4tr, provides retirement security to about 1.3 members. Treasury has shown that an increase of 1% on the wage bill, results in an increase of pension liabilities of about R9bn.
BRICS commitments
The establishment of the BRICS Development Bank has come at a cost for member states. Each of the five members are expected to make $2bn capital contributions. South Africa’s contribution is scheduled to be paid over seven years. So far $150m has been paid from the funds raised through the sale of government’s stake in Vodacom.
Tax amnesty
Treasury has invited South Africans who are tax non-compliant on their offshore investments to participate in the newly announced Special Voluntary Disclosure Programme. Individuals and companies, upon lodging an application, receive tax relief under the programme which will last for six months, beginning in October 2016 to March 2017.
Bottom line
The big question raised going into this Budget was whether the minister will be able to turn the tide on the spiralling negative sentiment towards SA and especially on whether a downgrade on SA debt into non-investment grade will be averted. Tax hikes will improve the fiscus in the short-term.
However, given that capital gains tax increases have the potential to discourage investments, and the fact that minimal structural reforms were announced, the jury is still out on whether the economy can withstand a tighter fiscal and monetary policy.
*Lesiba Mothata is chief economist at Investment Solutions
