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Tax, tolls and more

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Tax, tolls and more

6th March 2015

By: Terence Creamer
Creamer Media Editor

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While some may view Finance Minister Nhlanhla Nene’s maiden Budget as little more than a ‘tax-and-toll’ document, there are a number of other key thrusts that also deserve attention.

Without question, the decision to raise personal income tax rates by a percentage point for all but the lowest earners was the main headline grabber. The move represented a fundamental change in direction, with rates having hitherto been declining as the South African Revenue Service improved its efficiencies and sought to widen the taxpayer pool.

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The decision to raise taxes was not surprising in itself, as it had been flagged for some time, including by Nene’s predecessor, Pravin Gordhan. The choice of a “progressive” tax was also far less politically sensitive than would have been the case had Nene decided to raise the value-added tax (VAT) rate, which would have had the Congress of South African Trade Unions, and others, on the warpath. And raising the fuel levy amid falling fuel prices was an obvious, albeit a little cynical, course of action.

Nevertheless, the directional change needs to be absorbed, as it appears that these hikes are but the start of a trend. New electricity levies will be debated in the coming months, along with a draft carbon tax Bill, and it is also quite possible that other recommendations of the Davis Tax Committee, including a VAT hike, could find their way into future Ministerial statements.

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What should also not be missed is that the underlying theme of this Budget, though, is all about consolidation. The rate of spending growth has been moderated through the expenditure ceiling; government will not use fiscal resources to bail out State-owned companies or even relieve the burden on Gauteng motorists; the pace at which debt will increase has been reined in, albeit at very high levels; and the deficit-reduction path remains more or less intact, notwithstanding a slippage to 3.9% from 3.6% in 2015/16, which has been attributed to the decision to allow for a one-off R15-billion reduction in the Unemployment Insurance Fund contribution.

By adopting this course of action, the National Treasury is attempting to prove to the ratings agencies that it is alive to the threats posed to the country’s finances by the prevailing low-growth climate and that it is ready to walk the fiscal-rebalancing talk.

However, there are serious risks with this adopted course. Government expenditure, albeit highly inefficient, has nevertheless played something of a role in stimulating the economy in the postcrisis era. The idea has been to use the country’s fiscal space, supported by accommodative monetary policy, to elevate growth levels, with the intention of handing that stimulus baton over to the private sector once those resources are exhausted.

The problem is that domestic constraints – the electricity shortages and ongoing labour hostility being the most notable – have left the private sector wary, to say the least. For this reason, the private investment outlook is weak and the growth outlook equally so.

Growth prospects have not been improved in the least by the Budget pendulum swing firmly and inevitably towards consolidation. Therefore, extraordinary non-Budgetary efforts will now be needed to improve confidence in the private sector, which currently offer the best hope on extricating South Africa from its current mess.

The best way to achieve this is through improved policy and project execution and far greater economic policy certainty. It remains to be seen whether Nene and the rest of government will deliver, despite the fact that they have the power to do just that.

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