Tomorrow’s national budget presentation in parliament will be the most important in two decades and is expected to include measures that will help South Africa avoid having its credit rating downgraded to junk status.
Finance Minister Nhlanhla Nene is widely expected to announce tax increases as he scrambles to raise an extra R12-billion this year and R15-billion next year.
We were given some warning of his intentions in his medium-term budget speech.
Nene is trying to shrink the budget deficit to 3.6% this year.
The government’s interest payments on its debt are already so high that ratings agency Standard & Poor’s has called them “unsustainable”.
Interest payments as a percentage of revenue have topped 10%, according to ratings agencies Fitch and S&P, and South African insurer Momentum.
“We are moving in completely the wrong direction and this is not what ratings agencies want to see,” said Momentum economist Sanisha Packirisamy.
Though South Africa’s debt in relation to the size of its economy is not particularly high, at 46.9%, it is growing as the state tries to recover from the hangover of the financial crisis and recession when it incurred large budget deficits.
It would be best if Nene tightened fiscal policy, Old Mutual Investment Group chief economist Rian le Roux told The Times.
“If taxes in the Budget are raised, the public should applaud, not curse, as it could be a small price to pay for maintaining this country’s investment-grade rating and financial stability,” he said.
Another downgrading by Moody’s, S&P and Fitch would classify South African government bonds as “junk”. Most analysts think such a downgrading would be highly unlikely if Nene delivered a solid Budget.
Pundits expect Nene to use as much “bracket creep” as possible, adjusting the tax brackets by less than inflation so that he can grab a bit more of your salary increase without you noticing.
His other options include raising the fuel levy by about 50c/litre, which could give the fiscus extra revenue of about R1-billion a month. Last year the levy was increased by 12c/litre and fuel prices have fallen sharply since then, thanks to lower global oil prices.
Packirisamy thought an increase in value-added tax was unlikely.
Ferdie Schneider, national head of tax at BDO SA, said that if Nene increased the VAT rate from 14% to 15% that would produce “a significant yield”.
“It’s a possibility but could be politically damaging because of its perceived impact on the poor,” he said.
But evidence that it really hits the poor disproportionately is sketchy because the adverse effects would be mitigated by the zero rating on important basic foodstuffs.
Muneer Hassan, the SA Institute of Chartered Accountants’ senior executive for tax legislation, warned that raising personal income tax would be a bad idea. More than half of the country’s income tax is collected from only 5% of the workforce.
“Increasing the personal income tax rate would place an excessive burden on individual taxpayers, and might lead to avoidance.
“An increase in tax rates could also affect the spending habits becauseconsumers would have less cash to save or spend,” he said.
Hassan feared this would lead to lower collections from indirect taxes and retard economic growth.
He doubted that a wealth tax or higher taxes on luxury goods would have the desired results because they would drive high-net-worth individuals out of the country and the administrative burden of collecting them would be high.
The institute believed that South Africa’s only workable long-term option was to increase tax revenue by growing the economy.
Most analysts expect that Nene will raise the taxes on tobacco and alcohol by more than the inflation rate.