It’s not about the taxes

GDP growth more important.

The 2015 National Budget was the first since 1994 that required government to increase taxes to raise revenue structurally rather than rely on the usual increases in sin taxes or specific tax changes, such as the carbon tax or NHS, which are motived by policy objectives.

The announced increase in personal tax was unashamedly about money, aimed at raising funds to finance existing government programmes that have become unaffordable.

Government was forced into this position by the prospect of sustained lower economic growth undermining the revenue base and the imperative to stabilise its debt burden to avoid further credit rating downgrades.

However taxes are not enough and cannot be determined in splendid isolation of broader economic objectives, notes Sanlam Investment Management economist Arthur Kamp.

Poverty cannot be reduced unless the economy grows fast. This requires less emphasis on taxing income, he says.

South Africa needs growth of 5% and more to reduce the unemployment rate and poverty meaningfully. While the overall tone of the budget was business-friendly, there were precious few tidbits in the budget for business.

“Our primary challenge is to deal with the structural and competitiveness challenges that hold back production and investment in our economy,” Finance minister Nhlanhla Nene said in his budget speech.

For government this means maintaining the manufacturing development incentives and support for growing service industries like business process outsourcing.

In addition special economic zones will receive R3.5 billion over the medium term, mainly for infrastructure development.

Nene added that “progress in agriculture and manufacturing employment requires a constructive labour relations environment and well targeted support for emerging enterprises.”

Nene did announce a more generous tax regime for businesses with an annual turnover of less than R1 million, while those businesses that turnover less than R335 000/year will pay no tax.

In addition the ministry for small business development will spend R3.5 billion over the medium term on mentoring and training support for small businesses.

Corporate taxes, which comprise just less than 20% of total tax, were left unchanged, in recognition that companies are already under pressure from the slow growing economy and rising costs such as electricity.

Nene made repeated mention of the need to implement the structural reforms outlined in NDP – these include an investment in manufactured exports and productivity growth.

He added that government was looking at ways to reduce regulatory obstacles that could hinder growth in high growth industries like tourism, agriculture, agro-processing, light manufacturing and services.

With this in mind government is reconsidering the implications of visa regulations for tourism; aligning incentives and policy to support agriculture and agro processing; and promoting employment intensive aquaculture projects.

South Africa’s suppliers will be pleased that infrastructure investment remains a feature of government’s growth plans. Nene noted that capital investment has risen from 15% of GDP in 2002 to 20% in 2014, supported by large public-sector infrastructure investments.

However this is lower than the emerging market average which is around 35%-50%, says Jason Lightfoot portfolio manager at Futuregrowth Asset Management.
“This definitely needs to be ramped up especially when we look at the massive infrastructure back-log which the National Infrastructure Plan goes a long way to address with a targeted R4 trillion of infrastructure spend over the next 15 years or so.”

The budget provides little detail on how this will be addressed, instead noting that infrastructure investment by State Owned Enterprises is slowing. Eskom’s budgeted capital spending is declining as several major projects near completion; Transnet has trimmed its capex estimates in response to slower global growth; Sanral cannot invest in national roads if it is unable to raise the revenue; and the water sector has been constrained by delays in decision making.

The focus, says Nene, is on expanded private sector partnerships to deliver economic and social infrastructure. He added that there was a need to revive investment by the private sector.

The biggest infrastructure spender over the last financial year was the IDC, says Lightfoot, which disbursed R11.2 billion, largely into the renewable energy space.

The Renewable Energy Independent Power Producer Procurement Programme is a classic example of how the state and private sector can work together.

According to Nene, South Africa’s development finance institutions will expand their loan books by 33% over the next two years to support the economy.

Despite noting that exports to Africa grew by 11% and the rest of the continent now accounts for 19.2% of South Africa’s exports there was little detail on moves to improve trade linkages on the sub continent.

Annual investment by SA companies into Africa increased from R5.5 billion in 2002 to R36.8 billion in 2013. Dividend receipts increased from 2% (as a % of the total) to 14.9% in 2013. This investment is worthy of support as the dividend receipts will in time help improve SA’s current account balance.

No new regulatory reforms were mentioned but existing programmes like SARS’ customs modernisation programme, streamlined company registration processes, government’s One Environmental System – to shorten process of getting mining, environmental and water licenses – were mentioned.

There was not much meat in the budget for business, but if Minister Nene’s budget promises are translated into more tangible action, business would be happy.

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