In the history of RSA tax, Finance Minister Trevor Manuel could perhaps be described as ‘a great batsman on an easy wicket. Somewhat like Jacques Kallis but never as dull as Kepler Wessels’.
Prior to 2008, driven by growth rates above 4% per annum South Africa’s tax engine was firing on all cylinders. The going was easy for Trevor Manuel. But South Africa’s national budget contained no contingency for the slowing of economic growth that emerged from 2011.
So much for those famous words ‘the after-effects of the financial crisis will be short lived.’ The slowdown in the recovery rates post 2010 was not anticipated and has had a profound effect on tax collections, particularly corporate tax.
Prior to 2009, with the economy was growing at +4%; there was space in the National Budget to reduce the corporate rate from 35% to 30% in 2000 and to 28% by 2008.
The important point remains that RSA has three major taxes, Corporate Income Tax, VAT and Personal Income Tax, totalling more than 80% of total tax collections. If there is a problem in any one of the ‘Big 3’ the remaining smaller taxes cannot make up the difference.
The aftermath of the financial crisis is quite simply that lower growth rates have a direct effect on tax collections from 12% in the glory days of Trevor Manuel to around 8% today. This is perhaps not sufficient to achieve the objectives of the National Development Plan.
Despite the gloomy picture RSA has come very close to achieving the tax collection targets set for the 2013/14 tax-year. And many of the gloomy calls from commentators prior to the budget did not materialize. Others will of course say that ‘this was always going to be an election budget.’
Budgeted tax collections for the 2014/15 fiscal year set the target of increasing tax collections by R100 Billion over 2013/14. The tax increases will be achieved largely through inflation. None of ‘ Big 3’ tax rates have increased.
On the expenditure side there are no surprises either. State expenditure will increase to R1,183 billion. This means that the ever-increasing national debt trajectory has been checked. The question that remains is quite simply ‘is the State doing enough to stimulate the economy and accelerate towards achieving the objectives of the National Development Plan?’
The above graphic demonstrates the priority focus of current national budgeted expenditure towards the provision of social security for all South Africans. However a legacy of our past remains that the vast majority of South Africans cannot afford social security tax. Many countries place heavy reliance on social security tax as the fourth tax, thus reducing reliance on other taxes, particularly corporate tax.
Income tax highlights
Corporate tax rates
The flat 28% corporate tax rate has been retained. It is hoped that the recent recovery in growth rates will increase corporate tax revenues by R22 billion in the next year.
Dividend tax collections are well short of target. Presumably this is due to the exemption granted to retirement funds. Fortunately neither the rate nor the exemptions have been changed.
The annual fiscal drag adjustment has been granted to personal income taxpayers (R9 billion.) This is most commendable as the easy way to collect additional personal tax would be to limit the fiscal drag adjustment to below last years level of R7 billion.
There was no increase in the super-tax marginal rate despite many predictions that this would happen.
As predicted the VAT rate has remained at 14%. This was to be expected in an election year. Despite lagging consumer demand VAT collections are remarkably still on track. This is indeed fortunate as VAT collections suffered a major blow following the 2009 recession.
Many commentators suggest that the solution to South Africa’s tax shortage would be to increase the VAT rate from 14% to 17,5%. There is merit to this argument as South Africa has a comparatively low rate by international standards. However this argument is perhaps academic as an increase in the VAT rate is not a politically acceptable prospect.
Carbon emissions tax, fuel levy and electricity levy
The scheduled implementation of CET of 1 January 2015 has been postponed to 2016. This is indeed welcome as there are many technical difficulties in CET still to be resolved. There is no indication that that the forfeited revenues will be recovered by from fuel or electricity levies.
The fuel levy increase is a modest 12 cents per litre, coupled with an increased Road Accident fund Levy of 8 cents per litre, effective 20 cents per litre, effective early April 2014. This is below last year’s increase.
Electricity levy has not increased.
The annual increases in sin tax are unavoidable and are no more or less than anticipated. An extra 9 cents per beer, R4, 80 for a bottle of spirits and 68 cents per pack of 20 cigarettes are unavoidable (unless you stop!)
There are no changes in the rates and thresholds of capital gains tax, donations tax and estate duty. The Davis Tax Committee will investigate these taxes during 2014.
Retirement fund withdrawals
There are some small changes in the tax thresholds for retirement funds. Please do not overreact to these concessions.
The concessions now make it worthwhile to withdraw as much as R500 000 tax-free on retirement. This does not detract from the fact that retirement funds are a tax haven today and many taxpayers would be better off retaining their investments within the retirement fund until they are needed and withdrawn by way of an annuity.
2014 is going to be a good year to revisit financial plans in anticipation of a range of reforms scheduled for implementation on 1 March 2015.
The Reserve Bank and interest rates
The premium attached to short-term investment in RSA deposits has dropped since 2007. Yet there is sound argument that South Africa’s risk profile has increased. When this is coupled with the international investment deleverage foreign investment in short term RSA interest is declining. The situation is aggravated by the Marikana tragedy and a prolonged 2013 strike season.
Exports have been weak during 2013. In particular there has been a decline in international commodity prices and a fall in motor vehicle exports due to prolonged shut downs of production caused by labour disputes.
All of the above creates the second deficit in the balance of payments current account deficit. The above graphic draws much adverse attention from the international rating agencies.
During good times pre 2009 South Africa received to favourable upgrades in long-term foreign currency sovereign credit ratings to BBB+ status. In October 2012 this was lowered to BBB status. The danger that currently exists is that ‘ two further downgrades will reduce South Africa rating to Junk status.’ This would prohibit many international investors from holding South Africa investments, leading to a massive exit of foreign investment and a resultant currency crisis.
All of the above has led to a decline in exchange rates across 2013 and into 2014.
The national budget speech is very reassuring from an income tax perspective but it will not necessarily resolve the difficulties that remain for the Rand.
Every South African should make sure that their financial planning takes account of the vulnerable Rand.
The privileged South African perspective of the National Budget speech
In short, the privileged South African is looking to the Budget Speech to provide sound economic policy that will lead to
- Increased growth rates,
- Containing the national deficit to acceptable proportions,
- Effective and efficient government expenditure,
- Comfort for the foreign investor that all is well in spite of elections in 2014‚ the rand volatile and South Africa’s sovereign rating at risk of a further downgrade by the rating agencies.
Many are looking for concrete evidence that National Treasury is actively supporting the objectives of the National Development Plan.
Most of the above has been achieved on 26 February 2014, in as far as it can be. It was indeed a good afternoon for the privileged South African.
The under–privileged South African perspective of the MTPS
In short the under-privileged South African has waited far to long for promised accelerated delivery. The ideals of sound economic policy must be or can be of little comfort. Situation critical is the stance of COSATU, the key pillar of the tri-partite alliance that underpins the ANC government. COSATU has openly criticised the NDP.
With elections looming in 2014 Pravin Gordhan has certainly not tried to buy votes with the national budget.
Pravin Gordhan had very little space to work in delivering the 2014/15 National Budget. But the effect is impressive:
- He has not bowed to political pressure to abandon the NDP.
- The National Budget is on track with the associated problems recognized and dealt with.
- Sound fiscal strategy has been maintained.
- Concrete steps have commenced to tackle wastage of taxpayers’ money.
This is as all as good as it could get for South Africa!
Professor Lester is a professor at the Rhodes Business School, Grahamstown. www.criticalthought.co.za