Tag: budget speech

South Africa’s economy is in bad shape

Source: FNB

The Medium-Term Budget Policy Statement (MTBPS) is an update by the National Treasury of the South African government’s financial health relative to what was proposed in the main Budget Review tabled in February.

In his opening remarks Finance Minister Tito Mboweni presented an Aloe ferox to the House, which he highlighted had survived a bitter cold winter during which the ground had become hard.

The Minister likened this plant to the toil that the average South African has been enduring through these challenging economic times.

While the 2019 MTBPS provided a reasonable framework given the challenging circumstances, Minister Mboweni emphasised that the timely implementation of much-needed structural reform was the silver bullet that would provide the fundamental support required for the South African economy to grow meaningfully and sustainably.

In sum, the MTBPS highlighted that chronically poor economic growth is putting pressure on tax revenue collection, while expenditure pressures continue to mount as the government continues to offer assistance to ailing state-owned entities (especially Eskom). Indeed, the combination of these factors has put the government between a rock and a hard place, as sovereign debt continues to rise at increasingly unsustainable levels.

Highlights of the budget:

  • In line with expectations, there was a material deterioration in the fiscal deficit. The estimate for the main budget balance widened to an average of -6.2% of GDP in 2019/20, compared to the -4.7% estimate from the 2019 Budget Review.
  • There were no announcements of tax increases. The Treasury acknowledged that tax measures implemented in recent years have not translated into stronger economic growth. However, given the severity of revenue under-collection, they will still consider additional tax measures in the 2020 Budget Review.
  • Encouragingly, the expenditure ceiling (which excludes Eskom) was lowered for this year and the next two years.

Key takeaways:

  • The reaction of the rand has been largely negative, with the R186 bond yield spiking by roughly 16bps from yesterday’s close on release of the budget.
  • A wider fiscal deficit combined with a higher debt-to-GDP ratio through the forecast horizon will be credit negative for Moody’s sovereign rating decision. However, we remain of the view that South Africa will maintain its investment grade rating status, although the possibility of being placed on a negative outlook has increased.
  • Equity prices have also been adversely affected, with the JSE All Share Index falling by approximately 0.3% from yesterday’s close. In all, much needed structural reforms that lend support to lifting potential economic growth and consequently equity prices will need to be announced in the February 2020 Budget Review.

What the 2019 budget means for you

By Dewald Van Rensburg for City Press

The 2019 budget review report deceptively promises that this year’s budget speech will “not increase taxes” but actually a number of minor taxes will increase from the start of the new tax year on April 1.

Major taxes like valued added tax (VAT) and corporate income tax won’t increase in the upcoming 2020 tax year.

However, the budget speech relies heavily on fiscal drag – basically a surreptitious way of increasing personal income taxes.

According to the document, the budget “will not increase tax rates in any category. Instead, they will increase collections by not adjusting for inflation.”

That is effectively a tax increase of R12.8 billion – the vast majority of extra revenue National Treasury hopes to scrape in.

Fiscal drag operates by having people, who have normal inflation-related increases in pay, jump into new higher tax brackets because the brackets have not also moved up by at least inflation.

“Sin” taxes on alcohol and tobacco will be hiked.

These will increase, but these increases are automatic and based on market prices, not on deliberate tax increases, said the budget review report.

Another tax being increased is the Health Promotion Levy, popularly known as the sugar tax.

It will increase from 2.1 cents per gram of sugar in a soft drink – to 2.21 cents.

Another new tax that will hit motorists this year is the carbon tax on petrol and diesel.

This tax will kick in in June this year and add nine cents to a litre of petrol and 10 cents to diesel.

The existing levies on fuel also go up “by less than inflation”.

Treasury estimates that taxes will become 41.8% of the pump price in Gauteng compared with 40.6% before the increases.

The rest of the carbon tax is also set to start in June this year despite key regulations still not being finalised. There will be a “consultation workshop” on offsetting the tax in March and new regulations around sectors with high exposure to foreign competition will be published before the end of February.

Treasury also seems convinced that the end of the Tom Moyane era at the South African Revenue Service (Sars) should increase tax collections by restoring efficacy.

The budget review held up the outcomes of the recent Sars commission, which found Moyane’s reign at the tax collector was characterised by “maladministration and abuse of tender procedures”.

The commission’s recommendations will be implemented in the near future, Mboweni promised.

Among the things that knock down tax collection from companies was the poor performance of the mining sector and the financial sector.

Eskom’s massive diesel-fuelled emergency plants are contributing too.

“Higher diesel refund payments to electricity generation plants and primary producers, such as farmers and mining companies, have slowed fuel levy collections.”

The VAT increase from 14% to 15% brought in about what was expected, but much of that flew out the window as VAT refunds, said the budget review.

Almost all categories of tax collection under-delivered.

Personal and corporate income taxes delivered R21 billion less than expected.

VAT alone brought in R22.2 billion less than hoped.

This was due to Sars trying to clear out the so-called VAT credit book – unpaid VAT refunds due to taxpayers. It had previously been alleged that Moyane’s Sars was intentionally withholding these refunds in order to inflate Sars’ apparent performance.

Tax expenditure

The budget review pointed out that tax expenditure on various incentive schemes was growing faster than expected, eating away at tax revenues.

“Compared with the 2018 budget, the average share of tax expenditures to nominal GDP increased significantly, implying much higher foregone revenue,” said the document.

Since 2014, tax breaks have grown by R52 billion or 7.4% compared with GDP growth of 5.1%.

One recent addition to the suit of tax breaks is the venture capital incentive that cuts taxes for people who contribute to venture financing for investments in small companies.

The incentive as a whole is still a small part of the overall tax expenditure, but has shown a highly concentrated pattern.

About half of all spending on the venture capital incentive goes to 61 companies out of the more than 3000 who participate.

The employment tax incentive, known as the youth wage subsidy, climbed to R4.6 billion in the 2016/17 – the last year the budget has estimates for.

Treasury wants to expand it in line with the CEO Initiatives’ Youth Employment Service scheme, which hinges on a lot of new jobs for young people being subsidised by government.

In the new budget, a major change is made. The scheme’s maximum R1000-a-month subsidy will now go to young people earning R4500, not R4000.

In the course of 2018 another major increase in the scope of the subsidy was announced.

It will now apply to all workers earing below R6500 in special economic zones, no matter their age.

South Africa’s subscription for shares in the New Development Bank set up by the Brics counties, which are Brazil, Russia, India, China and South Africa, will soon displace the International Monetary Fund (IMF) as the country’s largest exposure to a multilateral funder.

According to the statistical annexures of the budget review, South Africa’s subscription for shares in the bank will be R89.4 billion by 2021 compared with the current R50 billion.

This reflects shares that have not been paid for, but can get called up if the New Development Bank ever fell into financial trouble.

Similar shares in the IMF currently total R80 billion but will only grow to R85 billion by 2021, getting eclipsed by the New Development Bank.

South Africa also has shares in the World Bank worth R25 billion and the African Development Bank worth R47 billion which will not grow much over the next few years, according to the budget.

These commitments are very unlikely to ever get called up, Treasury said.

Grants

Social grants will be increased by 5% this year, reaching R1780 for the old age grant and R425 for the child support grant.

Total grant expenditure will likely increase from R192.7 billion to R207 billion with a minimal amount of this increase being due to additional beneficiaries.

Old age grants remain the major expense at R76.9 billion with child support costing R65 billion in the year.

The number of child support grant beneficiaries is estimated to increase by 1.5% while state pensioners are set to increases by 3.5%.

E-tolls

A once-off bailout for the Gauteng e-toll roads in getting cut this year, reducing expenditure on the ill-fated project from R6.3 billion down to R633 million by 2022.

The boss’s party

The presidency’s budget of R552 million will increase to R655 million in 2022, mostly because President Cyril Ramaphosa is reestablishing an old research and support unit that the presidency used to have.

The inauguration of the new president after the 2019 elections, most likely Ramaphosa, will get R120 million.

So long Hlaudi

The SABC is set to completely abandon the 90% local content target set by controversial former chief operations officer Hlaudi Motsoeneng.

The new targets for local content up to 2022 will severely impact the local industry. They are 55% for SABC 1 and 2 and only 45% for SABC 3.

The spending on local television content will fall from R2.55 billion last year to R2.28 billion this year. It won’t recover to historic levels in the next three years.

Over the next three years the SABC will also spend R7.2 billion on local radio content, the budget’s analysis of expenditure added. This will also decline year after year from R972 million this year to only R812 million next year.

The budget also envisions a personnel freeze at the SABC with employee levels staying at 3635 until at least 2022.

Fewer trips please

The department of international affairs has been given a target to reduce the number of international trips it organises to meet “high level potential investors”. Last year it had 161 such trips, but its target will be 90 a year from now on. This is to keep “in line with budget allocations”.

Fees still falling

In the wake of the Fees Must Fall campaign and renewed protests at technical colleges this year, the higher education budget reflects more major shifts in spending.

Preliminary figures show that university enrolments this year jumped from 975 837 to about 1 039 500 while technical and vocational education and training students increased more modestly to from about 703 000 to 710 000.

The big difference is that 450 000 of these students now receive some form of state support – more than double the previous year’s 225 000 – according to the budget document.

The spending at universities shot up almost 50% to R60 billion last year will reach R85 billion by 2022, according to the latest estimates.

By far most of this will go through National Student Financial Aid Scheme, not through universities directly.

One of the biggest changes in finance minister Malusi Gigaba’s recent budget speech was the proposed increase of the VAT rate to 15%.

While the rate is still subject to final parliamentary approval, it is expected to come into effect from 1 April 2018.

Despite the increase being the first in over two decades, the VAT Act currently contains a number of rules which cater for an increase in the VAT rate.

These rules cover, for example, what happens when contracts have been entered into before the VAT rate is increased, where no invoice has yet been issued or payment received.

They also explain why its important to actively track and issue receipts when these transactions are made, to ensure that the correct VAT rate is applied.

Di Hurworth, director of Value Added Tax at KPMG South Africa, broke down exactly how these rules will work when the VAT rate changes in April:

Should goods have been provided before 1 April, or services performed before 1 April, then the current VAT rate (14%), not the new VAT rate of 15%, will apply.

Should goods be provided on a periodic basis or services be performed over a period which falls before and after the effective date of 1 April, then an apportionment must be made on a fair and reasonable basis and the 14% VAT rate will apply to the portion before 1 April 2018, and the VAT rate of 15% will apply on the portion of the supply of goods or services from 1 April 2018.

Specific rules relate to the sale of fixed property.

Hurworth said that there were also special considerations where the time of supply (invoice or payment) falls within the period from the date the minister announces the increase in the VAT rate (21 February 2018) and ending on 1 April 2018.

“If the goods will be provided more than 21 days after 1 April, or the services will be performed after 1 April, the new VAT rate should be charged on the supply of goods or services – i.e. 15%,” she said.

“However, there are certain exceptions to this. This rule therefore prevents invoices being raised before 1 April where goods will be supplied more than 21 days after the effective date.”

Source: Supermarket & Retailer

Budget: State-owned ICT companies by 2020

The Department of Telecommunications and Postal Services (DTPS) plans to establish a state IT company and a state ICT infrastructure company by 2020, although the exact functions of these new companies remain a mystery.

The telecoms ministry confirmed the news in the Estimates of National Expenditure (ENE) document, handed out to coincide with finance minister Malusi Gigaba’s National Budget Speech.

According to the DTPS, establishing these two new entities will involve merging different functions of the State IT Agency, Sentech and Broadband Infraco.

ITWeb first reported on the news of two state-owned ICT companies last year, noting the department had developed a consolidated SOC rationalisation process of key state-owned companies to form a state IT and ICT infrastructure company.

The ENE document says: “The department has submitted proposals for the establishment of these companies to Cabinet for approval and plans to draft their proposed mandates in 2017/18. Draft legislation will be developed for these companies in 2018/19 for submission to Parliament in 2019/20.

“To fund these activities, allocations to the ICT Enterprise Development and Public Entities Oversight programme are expected to amount to R797.4 million over the medium-term.”

Over the medium-term, the department pointed out it also plans to continue with the phased implementation of the 2016 White Paper on National Integrated ICT Policy, which will entail changes to existing legislation and the development of new legislation.

The White Paper was finalised and published in September 2016, and is supposed to replace the separate white papers on telecommunication (1996) and postal services (1998).

According to the department, it has identified that the Electronic Communications Act and the State Information Technology Agency Act require revision, and ICT commission and tribunal, and ICT state infrastructure bills need to be developed to make provisions for the department’s long-term strategic intent.

“To give effect to these activities, spending in the policy, research and capacity development programme is expected to amount to R271.2 million over the medium-term, increasing at an average annual rate of 4%.”

By Simnikiwe Mzekandaba for ITWeb 

In November 2017, the government announced additional steps it would take to reduce its budget deficit by R40bn in the 2018–19 financial year, through reducing expenditure by R25bn and increasing revenue by R15bn.

This was in addition to R15bn-worth of additional tax hikes announced in the 2016 national Budget and R31bn in additional spending cuts of R15bn and R16bn announced in the 2016 and 2017 national budgets, respectively.

The latest monthly government budget figures for December 2017 suggest revenues are likely to undershoot the February 2017 estimates by close to R50bn, broadly in line with the government’s estimates outlined in the October 2017 medium-term budget.

The value-added tax (VAT) rate in South Africa was last raised to 14% in 1993 (from 10%) and remains below that of a number of the country’s emerging-market peers. Moreover, South Africa’s narrow tax base makes the case for a rise in VAT over a further increase in personal income-tax rates. The Treasury’s tax statistics suggest about 1.7m taxpayers were responsible for 78% of all personal income tax collected in the 2016–17 financial year. This points to a tax base that is too dependent on a small number of individuals.

Although raising VAT is a more effective way of increasing revenues, it would be a controversial decision ahead of national polls in 2019. In Momentum Investments’ opinion, a number of alternative revenue-raising options to raising VAT exist at this stage (see the table below).

These include allowing for limited compensation for fiscal drag (the government was able to collect R12bn through this avenue in the previous fiscal year); removing the VAT zero-rating on fuel (this could raise up to R18bn but prove contentious, as the taxi industry is a powerful constituency within the ruling party); and raising sin taxes (on alcoholic beverages and tobacco). The government raised R2bn from the latter in the previous fiscal year.

Momentum Investments believes that raising the top marginal tax rate from 45% would hurt already fragile consumer confidence and subdued household spend. Similarly, the company does not expect a hike in the company tax rate (currently at 28%). Previously, the Davis Tax Committee alluded to a large gap between the headline and effective corporate tax rates in South Africa, suggesting a number of loopholes needed to be addressed before considering a hike in the company tax rate.

The government has additionally committed to implementing the health promotion levy (or sugar tax) by April 1 2018, which could raise an additional R2bn. Moreover, wealth taxes have been debated, but SBG Securities estimates this could raise between R5bn and R8bn at most. In its February 2017 Budget, the government highlighted it was refining measures to prevent tax avoidance through the use of trusts, which could boost revenue collection at the margin.

Wealth taxes have been debated, but SBG Securities estimates this could raise between R5bn and R8bn at most
Absa notes the government could consider removing the VAT exemption on municipal property rates to generate higher revenues. The February 2017 Budget showed this exemption amounted to R10.5bn in the 2014–15 financial year.

While previously the Davis Tax Committee acknowledged VAT as a potential source of funding for additional spending needs, such as the National Health Insurance scheme, recent comments made by the current health minister hinted at using medical tax credits as an alternative source of funding. The minister noted that 8.8m people belonged to a medical scheme. This could provide about R20bn in tax credits per year, which would be sufficient to cover the health ministry’s priority programmes (amounting to R69bn over four years).

Also, the Treasury published its Draft Carbon Tax Bill for public comment, open until March 2018. The actual date of the carbon tax has not yet been announced, but the Treasury noted it would be complemented by a package of tax incentives and revenue-recycling measures to minimise the effect on energy-intensive sectors in the first phase (up to 2022). The Treasury also said the effect of the tax in the first phase was designed to be revenue neutral, after taking the complementary measures into account.

Possible revenue measures
Fiscal drag: Intake – R12bn (last year); likelihood: very high probability
Fuel levies or VAT on fuel: Intake – R3.2bn (last year) or R18.2bn; likelihood: high probability
Sin taxes (alcohol and tobacco): Intake – R2bn (last year); likelihood: high probability
Sugar tax: Intake – R2bn; likelihood: bill passed and due for implementation
Wealth tax: Intake – R5bn–R8bn; likelihood: high probability – delays?
Carbon tax: Intake – initially revenue neutral; likelihood: high probability – draft bill out for public comment
Removal of medical aid tax credit: Intake – R20bn or R2bn (above R750,000); likelihood: moderate probability (higher in medium term)
Dividend withholding tax: Intake – R6.8bn (last year); likelihood: moderate probability (increased previously)
Taxing top marginal bracket: Intake – R4.4bn (last year); likelihood: low probability (steep increase previously)
VAT (0.5% increase): Intake – R11.5bn (last year); likelihood: low probability (higher in medium term)
Company tax increase: Intake – ?; likelihood: low probability (negative business sentiment)

(Source: Nedbank, RMBMS, SBG Securities, national Treasury, Momentum Investments)

While the revenue shortfall for the 2017–18 financial year is in large part due to lower growth outcomes, lower tax buoyancy rates (tax revenue growth per unit of gross domestic product growth) exacerbated low revenue outcomes.

Media reports have suggested the hit to institutional credibility at the South African Revenue Service has negatively affected personal and corporate tax morality. The overall tax buoyancy ratio dipped to 1.01 in the 2016–17 financial year, but the Treasury anticipates a recovery to 1.31 in 2018–19 before a decline to 1.1 in 2020–21 (still above the long-term average of 1.08). A further breakdown of the Treasury’s tax buoyancy projections suggest a sharp pick-up in the company tax and VAT buoyancy rates in the medium term.

By Sanisha Packirisamy and Herman van Papendorp for Business Live

Budget 2017: all you need to know

Minister of Finance Pravin Gordhan delivered the national budget in Parliament on 22 February 2017.

Gordhan warned South Africans of tough times ahead while addressing the National Assembly in his sixth Budget Speech.

He spoke about the introduction of a new tax bracket for the rich earning R1.5 million and higher, touched on the growing state debt as well as some of the economic indicators that put our fiscal numbers at a lower rate than the budget last year.

He also indicated that our growth has been too slow – just 1 per cent a year in real per capita terms over the past 25 years. He highlighted government’s responsibility to the poor and the important of maintaining existing infrastructures instead always building new infrastructure.

The Treasury pointed out some key elements around the budget:

The proposed expenditure for 2017/18 totals R1.56 trillion and revenue totals R1.41 trillion.
Government debt will stabilise at about 48 per cent of GDP over the next three years.
Government’s wage bill has stabilised.
47.5 per cent of available funds are allocated to national government, 43.4 per cent to provinces and 9.1 per cent to local government.
The balance of R149 billion, or 3.1 per cent of GDP, will be borrowed
Government debt now stands at R2.2 trillion, or 50.7 per cent of GDP.

Gordhan introduced four game changers: Municipal standard charts of accounts – municipal finances, Target supply chain management systems, Revenue management – appropriate tariff settings and improved asset management.

Inflation
Ater reaching 6.4% in 2016, consumer inflation is expected to decline to 5.7% in 2018.

Education
Substantial additional allocation to higher education is again proposed, adding R5 billion to the R32 billion previous.
Spending on basic education next year will be over R240 billion, or 17.5 per cent of the consolidated budget.
Allocations for school building increase at 12.5 per cent a year.
Spending on learning and teaching support materials increases by 9.5 per cent over the next three years.

Business
R3.9 billion has been allocated for small, medium and micro enterprises and cooperatives.
R1.5 billion fund to support small and medium enterprises has been established by private sector voluntarily.
Spending on agriculture, rural development and land reform amounting to nearly R30 billion by 2019/20.
The services sector was the main contributor to growth in 2016 bringing nearly 120 000 new work opportunities.
They have agreed to implement a minimum wage of R20 an hour with effect from next year.

Taxes
An additional R28 billion will be raised in taxes.
The annual allowance for tax free savings accounts will be increased to R33 000.
A new top personal income tax rate of 45 per cent for those with taxable incomes above R1.5 million.
An increase in the dividend withholding tax rate from 15 per cent to 20 per cent.

Social Grants
Gordhan highlighted that income growth has been uneven with the bottom 20 per cent benefiting from social grants and better access to services.
The old age grant will increase by R90 to R1600 for pensioners over the age of 60, and R1620 for those over 75.
The child support grant increases by R20 to R380 a month.
The disability and care dependency grants also increase by R90 to R1600 a month.

Housing
R114bn for subsidised public housing.
Houses under R900 000.00 will not attract transfer tax.

Fuel, sin tax and VAT
Increases in the excise duties for alcohol and tobacco, of between 6 per cent and 10 per cent.
The fuel levy will rise of 30 cents per litre.
A revised Carbon Tax Bill will be published for public consultation and tabling in Parliament by mid-2017.
Further consultations are currently taking place on the tax on sugary beverages.
The rate will be 2.1c per gram for sugar content above 4g per 100 ml.

Source: www.albertonrecord.co.za

Gordhan’s budget predicament

Budget Speech 2017 is scheduled for 14:00 today – and it may cost Finance Minister Pravin Gordhan his job.

Finance Minister Pravin Gordhan has to weigh the impact of higher taxes and reduced government spending on growth as he tries to keep the country’s investment-grade credit rating.

Political infighting has stifled efforts to boost confidence in the economy and increase growth and therefore tax revenue. Economic expansion probably decelerated to 0.4% last year, according to the central bank, the slowest rate since a 2009 recession. That’s hindered efforts to rein in the budget deficit and limit government debt.

“The only feasible, sustainable way of working ourselves out of this problem is to grow this economy,” said Ernie Lai King, head of taxation at Hogan Lovells in Johannesburg.

In October, Gordhan said tax-policy measures will raise an extra R43-billion ($3,3-billion) and spending will be reduced by R26bn in the next two years to narrow the budget shortfall.

Gordhan may raise personal-income taxes, following former Finance Minister Nhlanhla Nene’s 1 percentage-point increase in the marginal rate in fiscal 2016, according to Andrew Wellsted, head of tax at Norton Rose Fulbright in South Africa. Raising the 14% value-added tax rate is another option, but may prove difficult to implement after a government-commissioned tax-review committee said an increase would hurt growth and inflation.

A 1 percentage-point increase in VAT could raise a much as R15bn annually in additional income, according to Muziwethu Mathema, an economist at KPMGin Johannesburg. Increases in estate duty and a doubling of capital-gains tax could deliver as much as R5bn in extra revenue and are probable given the tone that President Jacob Zuma adopted in his State of the Nation Address, said George Herman, head of South African portfolios at Citadel Investment Services.

Zuma repeated pledges by the African National Congress to use the state to reduce racial inequality and ease poverty. Together with some of his ministers he has called for more government spending on projects such as nuclear power plants.

In October, the National Treasury predicted the budget deficit in the year through March 2018 would narrow to 3.1% of gross domestic product. The gap is likely to be 3.2% in 2017-18, according to the median of 13 economists’ forecasts compiled by Bloomberg. The fiscal shortfall puts pressure to the government to borrow more, adding to debt levels.

Gross debt as a percentage of GDP exceeded 50% for the first time since 1999 in the second quarter of 2016, central bank data show. S&P Global Ratings sees this ratio reaching 54% of GDP in 2019, it said in December, when it kept the nation’s credit rating at one level above junk.

“He hasn’t been able to control the debt-to GDP-ratio and he would struggle to do that with growth as low as it is,” said Kevin Lings, chief economist at Stanlib Asset Management in Johannesburg.

The International Monetary Fund forecasts GDP expansion at 0.8% in 2017. Gordhan predicted 1.3% in October. Low economic growth rates hurt the country’s fiscal performance and debt stock, according to rating companies.

South Africa must do more than keep its spending under control to prevent being downgraded to junk, Gardner Rusike, an analyst at S&P, said on February 15. Better economic growth is one of the key factors, he said.

Fiscal consolidation isn’t easy and it isn’t popular. It may cost Gordhan his job.

By Arabile Gumede, Bloomberg News for Fin24

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