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Budget in tough times calls for proper trade-offs

Experts are hoping for a boring tabling this year.
It will be encouraging if the words 'efficiency' and 'productivity' feature in Enoch Godongwana’s budget speech. Image: Elmond Jiyane/GCIS

Tax experts and economists have been polishing their crystal balls in anticipation of this year’s budget, set to be tabled on Wednesday, February 23. Most are hoping for a boring budget.

Finance Minister Enoch Godongwana will be delivering his first budget speech at a time when taxpayers are feeling the crush of rising inflation, huge fuel price increases and the start of a series of interest rate hikes.

Mediocre economic growth – nowhere close to the 5.5% of 2007, despite several tailwinds in the recent past – begs for the much-talked-about structural reforms.

Promises versus possible

Given the resource constraints, the minister can hardly deliver on the promises he has made, says Gaba Tabane, director of government and public service at Deloitte.

Social grants amount to 14% of the national budget and the public sector wage bill takes up 35%.

The minister will have to make proper trade-offs to ensure the country functions effectively, says Tabane.


Investments must flow 

Structural reform (to ensure economic growth) is free, points out Martyn Davies, MD of emerging markets and Africa at Deloitte, speaking at the firm’s recent budget roundtable.

He says successful economies in Europa, Asia and in our own region invest roughly 30% of GDP annually into their economies.

According to the most recent Stats SA figures (second quarter of 2021) SA’s investment in infrastructure was at a “staggeringly low level” of 12.5%. “This is problematic,” says Davies.

If private capital is allowed to play, investments will flow.

“Private enterprise is not asking government for a cheque. It is asking for a space to play in the liberalisation of the economy.”

Davies says despite strong tailwinds such as a declining currency that should have boosted exports, a relatively low (until recently) oil price, and a positive global outlook, the local economy has not grown.

Two words that are not often used in government talk are ‘efficiency’ and ‘productivity’. “If we do not have that we will always be in a structurally declining state. We need to aspire to be more competitive.”

Davies adds that government keeps focusing on existing jobs, but seems unable to conceptualise new jobs that are a result of liberalising the economy.

Tax collections

David French, tax consultant and member of the corporate tax work group of the South African Institute of Taxation (Sait), is not expecting anything radical in terms of tax changes.

“We are in a period of consolidation coming out of the pandemic over the past couple of years,” he says.

“Treasury has acknowledged that the direct tax rates in SA are on the high side.”

The corporate income tax rate of 28% will be lowered to 27% this year, and French writes in an article that there may even be signs that individual tax rates might come down.

However, he does not see it happening in the short to medium term, since there is “so much politics” in doing it.

National Treasury recently published SA’s latest revenue and expenditure figures, which show a potential overrun of close to R200 billion compared to the adjusted figure of R120 billion presented during the medium-term budget policy statement.

French notes that collections last November were at 68% of the revenue target. Historically, by November each year collections have been between 58% and 60% of the annual target. “So this is looking good for 2022 collections,” he says.

Angelique Worms, Deloitte director of global employer services, says this may leave room for inflationary adjustments in the tax brackets.

No increase

Increasing the tax rates to ensure higher tax collections is not a solution, she adds. The solution is economic growth, a bigger tax base and funding the right development.

Worms believes there is however room for tweaks in the way taxes are collected. “A lot of tax either gets collected on assessment or through provisional taxes which are paid every six months.”

Worms says the South African Revenue Service (Sars) may consider collecting tax directly from third party providers such as investment advisors or banks. This can be done by way of an automated withholding on capital gains or interest.

Sars has the technology to tweak the provisional tax system to allow taxpayers to pay the provisional tax as and when they earn the income, as opposed to waiting six months.

The increase in the value-added tax (Vat) rate may be an “easy” way to increase tax revenue, but consumers are under immense pressure due to higher inflation, higher fuel prices and a rise in the interest rate.

Severus Smuts, direct and indirect tax leader at Deloitte, says the Vat rate of 15% may be lower than some European countries, however it is on par with the rates in other African countries.

Increasing the rate will make little sense as people have less money to spend after they have made adjustments for the high costs of living in SA.



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