Mboweni is sitting on top of Pandora’s Box

But the nasties will find their way out.
It seems government realised that taxpayers would resist any tax increases, says the author. Image: Moneyweb

Taxpayers braced themselves for the expected bad news in the budget speech on Wednesday: an increase in value-added tax (Vat), an increase in capital gains tax, an increase in personal tax, and a possible increase in tax on retirement funds.

Instead, they heaved a collective sigh of relief when they heard Finance Minister Tito Mboweni announce that there will be no increase to Vat or personal income taxes, and that adjustments will be made to eliminate fiscal creep. The cap on the exemption of foreign remuneration earned by South African tax residents has been increased to R1.25 million per year from March 1, 2020.

How clever of the government, how cunning, to give taxpayers something to celebrate, though fleeting.

But it wasn’t being generous. It merely realised that South Africa had reached the optimum tax rate, and that taxpayers are gatvol and would resist any increase. (I wonder if there was a surge of investments into retirement annuities and section 12J investments in February?)

In reality, there is nothing for taxpayers to celebrate.

The tax on their hard-earned income has been frittered away by state capture and corruption, and they have to find a way to protect their savings from the possible collapse of the economy. Their burden will be made heavier by the staggering monthly exodus of skilled taxpayers.

What are the nasties?

Government workers were enraged to hear that government plans to save R160 billion over the next three years by cutting the public sector wage bill. Does this mean no increases and no bonuses over the next three years – or does government expect the R160 billion to be saved by natural attrition (death, retirement, resignations)?

Whatever the answer is, we can expect greater labour unrest, an interruption in services, poor delivery of services, and worker slowdowns.

How will the South African Revenue Service (Sars) be able to re-employ skills that have been lost and radically increase tax revenues without giving their staff increases?

On the other hand, will the government make some tough decisions and insist that critical departments not be unionised?

The end of March, when Sars determines the total amount of tax revenue collected, could deliver a big nasty.

Mboweni has not disclosed the total amount of government guarantees given to state-owned entities. Many of these entities are close to collapse.

The coronavirus struck after National Treasury had finalised its figures. The ultimate cost of this to our economy is yet to be seen. The JSE All Share Index (Alsi) has dropped more than 3 000 points over the last couple of weeks and is now sitting at 54 192.

The tough decisions that should have been made

Freebies enjoyed by ministers and members of parliament should have been eliminated.

Why should they receive untaxed allowances, and be treated differently to taxpayers?

Why should government ministers enjoy free security services? Why is the Handbook for Ministers not publicly available? This wouldn’t match the vast amount of irregular, fruitless and wasteful expenditure squandered by state-owned enterprises (SOEs), but it would give taxpayers some satisfaction.

Make tough decisions on courses studied at universities. Ask businesses what skills they require. Why should an impoverished government pay for courses that have no economic value?

Government could have culled some of the SOEs that have no economic value; those that employ overpaid executives, earn no revenue, and exist purely on government grants.

The Budget Review document mentions the seven largest borrowers. Their debt is just under R760 billion, of which government has guaranteed 62% (more than R484 billion). That’s just seven SOEs. Other massive SOEs in danger of collapse are not mentioned.

If the state wishes to appear credible, it should publish a full list – there are believed to be around 1 000 SOEs in total – along with the total amount of grants paid to them, whether they have published annual reports for the year ended March 31, 2019, and whether they are financially sustainable.

Furthermore, those annual reports should all be publicly available.

Is government still crooning over the supposed R360 billion capital pledges made? Well, why does this not reflect in the budgeted capital expenditure?

The main reason given for the reductions in projected revenue collection over the past two years has been “weaker than expected economic growth”. What rubbish. Other reasons include the untaxed proceeds of corruption and the untaxed grey economy.

Government will be “consulting” with affected industries on the introduction of export taxes on scrap metal. So much more can be done to regulate the scrap metal industry, but this will take commitment and guts.

Welcome news

It is comforting to see that National Treasury is pondering the viability of tax incentives:  “Do they work?”

And yes, incentives do “open up avenues for aggressive tax avoidance”. Sadly, it requires specialist skills to identify the tax avoidance structures.

A February 28 sunset clause has been applied to incentives dealing with airport and port assets, rolling stock, and loans for residential units. The 12I tax incentive relating to industrial policy projects will not be renewed beyond February 28, 2022.

Excessive corporate interest deductions will be curtailed. This will result in a business backlash. (Further comment will be made when I have studied the discussion document available on the National Treasury website.)

The use of assessed losses to reduce taxable income will be restricted to 80% of taxable income from January 1, 2021. There are many tax avoidance structures involving assessed loss companies, and this amendment will only partially impact this.

Finally, measures will be introduced to streamline the pay-as-you-earn process, which will reduce the administrative burden for employers.

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Good article.

I don’t agree with the proposals on assessed losses. They represent actual economic losses to the companies or individuals concerned. In other jurisdictions it is possible to carry losses incurred in the current year back to previous years. The whole issue of tax losses would be minimised if group tax was applied, which would be a more economically justifiable method of taxing groups. This is because often companies have to be established to ring-fence assets to provide security to secure funding.

hitting rock bottom and starting to dig – is a very scary situation.

Given the history of the ANC and similar African governments of a total inability of critical rational thoughts and avoiding reality ,the outcome is scary but clear – another typical Africa disaster like Zimbabwe in the making.

Tito has integrity and good intentions for RSA …but I think he would prefer to retreat to his farm and reflect on the chaos and rot afflicting the country
He knows its unlikely changes he asks will happen but perhaps prefers to be known as the first minister to admit the cure to the malaise afflicting RSA

Inertia. “The reluctance of a moving body to stop, or a stationary body to move”

Civil Servants have become fat after feeding at a very generous trough since 1994.

It’s not going to happen. Perhaps Rito should start with all politicians- National, Provincial and local officers by REDUCING their salaries by 25 % ( perks included).

Not going to happen.

They have warmed many seats but are yet to show any productivity and value add to the economy.

Looking at the ALSI this a.m. it has dropped by 1749 points to 51696 – what a disaster this government is in real terms

A dose of reality in answer to Tito’s perky little motivation speech! Bring on the clowns, but it would be more entertaining without the increased tax on alcohol!

A very valuable comment on courses presented at universities. Thousands of students graduate annually with a BA in Political science, Sociology Philosophy which means nothing. Universities should put a limit on the number accepted for those courses. We have a dire need in this country for good financial management of public funds. Even those who are not mathematically inclined can be trained to keep good, accurate asset registers. Government has millions of assets but do they know where those are and who is using them?

Just wait for the introduction of the Corona Virus.

Proper Black Swan event. SA’s margin of safety is paper thin and this country will be found severely wanting

End of comments.

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