Tag: budget

SA to miss tax target by over R300bn

By Lameez Omarjee for Fin24

SA will miss its original tax revenue target by over R300-billion this year, said Finance Minister Tito Mboweni.

During the tabling of the special adjustment budget on Wednesday, the minister explained that the country is already behind its 2020/21 tax revenue target by R35.3 billion. As a result, government has revised down the tax revenue target from R1.43 trillion to R1.12 trillion.

National Treasury recorded a R63.3 billion revenue shortfall in the 2019/20 tax year.

“We expect to miss our tax target for this year by over R300 billion,” Mboweni said.

While Mboweni did not announce any tax hikes to make up the shortfall, he said that tax measures of R40 billion would be needed over the next four years. Tax proposals will be announced in the 2021 budget.

Furthermore Treasury will work to find spending adjustments of R230 billion over the next two years.

He also touted the idea of zero-based budgeting. “This means that we will try to reduce all expenditure that we thought we can no longer afford. After all, we are not as rich as we were ten years ago,” Mboweni said.

Analysts had expected the budget to reveal a significant shortfall as a result of the lockdown which restricted economic activity and by extension tax revenue collections.

To cushion the blows of the lockdown on consumers and businesses, government implemented a R500 billion stimulus package, which included R70 billion in tax relief measures. These entailed deferrals on some tax payments such as excise duties, carbon tax and employee taxes. Government also opted to postpone tax proposals for corporate tax hikes and SARS was directed to fast track VAT refunds. Donations to the Solidarity Fund, set up to support the vulnerable in society, were also declared tax deductible.

A ban on cigarette and alcohol sales also had negative implications for excise duty collections. Back in April SARS Commissioner Edward Kieswetter said these restrictions saw a loss of R1.5 billion in excise duties. The minister has also been outspoken about his opposition to the ban on these items.

Bernard Sacks, tax partner at Mazars, noted that certain sectors of the economy had still not been able to restart operations, while some others are operating to a limited extent.

“The difficulties faced by Minister Mboweni are now immeasurably greater. Ways must be found to fund the steep rise in healthcare spending… Social grant spending will show steep increases as the unemployment rate soars even higher,” Sacks said.

There’s probably no reason to ditch your old creative because of coronavirus, but if you do, your new ad needs to be distinctive and avoid the bland clichés brands are currently churning out.

By Mark Ritson for Marketing Week

With no signal that our global lockdown is going to unlock itself any time soon, the attention of most marketing departments is moving from ‘should we advertise?’ to ‘how should we advertise?’. Even if a brand is lucky enough to find itself with some surviving top-line revenue and the remnants of an advertising budget, there is still the significant issue of what tone the subsequent creative should adopt.

As usual, most marketers are convinced that they need to dump everything, set fire to their previous campaign and start all over again. Maybe their original campaign features a formerly innocent shot of a dozen people crowded around the product in a very socially un-distant manner. Perhaps an otherwise excellent ad ends with a firm handshake or, God forbid, a hug that now sets off societal alarm bells.

Most likely, the marketer in charge simply thinks the world has changed so much that every aspect of the brand’s communications must now reflect lockdown. Unshaven fathers holding babies and mothers in jogging bottoms getting emotional on Skype.

It’s a new manifestation of an age-old problem in marketing. Even during more regular times, most brand managers lose interest in their advertising and want to change it long before the campaign has even bedded in, let alone achieved an enduring impact on the target audience.

Marketers forget that the four-month-long, eight-hour-a-day journey to create the new campaign was theirs and theirs alone. Most consumers never notice the ad before it is pulled and replaced with an equally transient successor.

A flood of generic messages

With the onset of Covid-19 the metabolism of tactical impatience has only increased further. Desperate to ‘pivot’ and be ‘agile’, most marketing teams are binning their current comms and looking for a new, Covid-appropriate way to talk to customers. You already know the formula.

A tinkling piano. Monochrome deserted streets. An old newspaper blows past. Empty chairs. Gloomy skies. Concerned faces. “We’ve been there for you since 19-something something,” says a comforting, homespun voice.

The tempo of the piano increases. The sun rises. “But in these unprecedented times,” the voice continues, “we can still be there for each other and our families.”

Product shot. Slow motion video of employees interacting in a friendly yet socially isolated manner. Children play at home on the sofa. An old person waves through a web cam. “Together with you.” Logo.

It’s wank. Clichéd wank. And it’s an enormous and embarrassing waste of money on the part of some of the world’s biggest brands. Just because we are in a strange and ‘unprecedented’ time does not mean that the usual rules of branding are deferred.

You still need to be distinctive. You still need to have an actual message. The fact that ‘Microsoft Sam’ was able to slice and dice a brilliant montage of all these ads into a seamless three-minute combination on YouTube (see video at the top) illustrates just how generic these campaigns really are.

There is no message behind all these drearily similar creative efforts other than that there is too much money and not enough marketing talent on hand. Brands like Uber, Samsung, Kia and Budweiser are superbly distinctive. They have clear brand codes. So why have they been displaced by identikit images of sunsets and empty streets?

Genericism, a lack of distinction or differentiation, and an overstated view of a brand’s cultural importance are now all on display.

These brands also have clear product positioning and brand associations they could be communicating. Where is the attempt to build brand associations? How about a good old-fashioned link to a product benefit? Has the virus killed off basic marketing too?

The blame lies with the inane and insipid marketers running many of the world’s biggest brands. While our economy boomed, they got away with their vacuous brand purpose nonsense. Formerly great brands threw away decades of heritage and turned to generic, woke-washed nonsense that made marketers feel better about their jobs at dinner parties and made consumers shrug, scratch their heads and get on with their day, none the wiser. Those same marketers are now clearly in charge of the initial slew of Covid-19 advertising.

Remember how all that brand purpose nonsense was incredibly generic? Remember how brand purpose climbed the benefit ladder past features, benefits and emotional associations and leapt from the top into a sea of pointless bullshit below? And remember how every purpose-driven marketer thought their brand had a big influence on consumers and society? All those traits – genericism, a lack of distinction or differentiation, and an overstated view of a brand’s cultural importance – are now all on display in these fumbling attempts at brand communication.

No need to switch creative

And is the new advertising really necessary at all? Orlando Wood at research company System1 would challenge the need for new creative. Wood, who once left me shitfaced and mumbling, drinking on my own in a dodgy bar in Toronto, has redeemed himself with his most recent research paper.

‘What Should Ads Look Like in the Time of Recession?’ is a fresh and insightful report commissioned by LinkedIn’s B2B Institute. Wood examines the degree to which TV ads can attract attention and garner an emotional response from consumers in the UK and US. Crucially, his data covers the first three months of 2020, therefore including the lockdown period that began in March.

Counter to what many marketers have been saying about a ‘new normal’ and changed responses from target consumers in lockdown, Wood uses the data to show that “there has been no appreciable change in the ability of ads to connect with audiences”.

That’s important because most of the ads that were seen during the coronavirus lockdown were designed long before Covid-19 had started its deadly assault on the global populace. Old ads are still performing just as well in the new normal.

Everything will change forever after coronavirus … won’t it?

To confirm this finding, Wood took a random selection of ads that were originally shown in January and February, and tested their responses among audiences at the end of March. Sure enough, as his chart below demonstrates, a pre-Covid ad’s performance among a pre-Covid audience (the X axis) is broadly analogous to its performance once lockdown had begun (Y axis).

There is a significant probability that your existing advertising will work just fine in the current crazy Covid period. And given how generic and cloying most of the new ‘agile’ advertising responses to coronavirus have turned out, it’s probably the correct tactical decision for most organisations.

It’s a less sexy finding than ‘everything you know about advertising must change, starting with your existing campaign strategy – burn your underpants and jump out of the window’. But that does not stop it from being the smarter, more effective and more economical recommendation.

Effective creative themes

If you really do want a new campaign in this strange context of coronavirus, Wood is also on hand to suggest some evidence-based direction for that advertising too. By identifying the ads that have performed better with consumers since the onset of coronavirus, Wood is able to suggest some key creative themes that seem to resonate more with Covid-hit consumers.

Fluent devices like Specsavers’ myopia or ‘Compare the Meerkat’ always pay back the brands that create them. But in times of great trouble, the fact that these characters inhabit a fictional universe a long way from coronavirus only adds further to their appeal and impact. The Jolly Green Giant will work better this month than he did at the start of the year. Ads that reference the past are also working better for Covid audiences. Sadly, the recent and more distant past were more pleasant places than the current period for most people, and that positivity appears to help as ads with a sense of history score higher in Wood’s analysis.

Finally, ads that celebrate ‘betweenness’, particularly among smaller groups or families, or which have a strong sense of place or community, are also impacting Covid audiences better now than before.

It’s too easy to just pick on the shit, clichéd failures. Who is actually on top of their game right now? Which brands have managed to reflect the new normal of a Covid-19 lockdown without completely losing their point of view or their ability to sell?

It was early in the crisis – so early that hitting a bar was still possible – but Guinness earned early line honours for its hastily altered St Patrick’s Day ad. With the big parades all cancelled on 17 March, Guinness was still building salience and brand associations, and reflecting the spirit of the times.

And the ad ticks a lot of Orlando Wood’s boxes too. It’s an ad steeped in history (tick), in a distinct place (tick), among a strong community (tick), and one that promotes a message of betweenness with every pixel (tick). And, in contrast to those woke watery Covid ads that followed it, this ad is distinctively Guinness in appearance, is redolent with the brand associations and – amazingly enough – has a product benefit attached to boot. Déanta go maith agat!

On a lesser note, Colgate also deserves plaudits for #Smilestrong. The tinkling pianos at the start might have been a portent of genericism but, in contrast with much of the crap now being released, this is an ad that again ticks all the right boxes.

We have community, family and betweenness and, because it has been created entirely from consumers’ own webcam conversations, there is a genuineness and an emotional payoff missing from bigger budget attempts to do the same thing. Best of all, this, like Guinness’s, is an ad that has actually attempted a direct link to a product benefit and up the ladder to an emotional impact too.

Advertising that actually advertises the product! What an amazing idea. That must be why it, almost, moved me to tears.

Big tax hikes loom

Source: MyBroadband

Finance Minister Tito Mboweni will deliver the 2020 National Budget on 26 February, and both Absa and Efficient Group chief economist Dawie Roodt predict significant tax increases this year.

Speaking to ENCA, Roodt said the state’s debt has reached such high levels that it is now in deep financial trouble.

He said the rate at which the government is borrowing money is increasing much faster than the rate at which the economy is growing.

According to Roodt, South Africa has reached a point where it is extremely difficult to turn the situation around.

To improve the country’s financial situation, the government will either have to cut spending or increase taxes.

With the government’s unwillingness to cut the public sector payroll or state spending, the only other option is to increase taxes.

Roodt said this means that tax hikes are not a possibility, but a certainty. The only question is which taxes will be increased.

Predicted tax increases

While Absa and Roodt agree that South Africans should brace themselves for tax increases this year, they differ on which taxes will be increased.

Roodt said he is sure things like the fuel levy and sin taxes – a tax on items such as alcohol and tobacco – will be increased, but this is a small part of total tax revenue.

He explained that there are only two main taxes which will make a real difference – personal income tax and value-added tax (VAT).

Roodt predicted that, in addition to various indirect taxes, there will be an increase in personal income tax rather than VAT.

Absa, in comparison, predicted that the government will increase the VAT rate by one percentage point to 16%.

The bank agreed with Roodt that the government is likely to lift indirect taxes in an effort to earn more revenue.

This year’s budget will be harsh

Economist Mike Schussler said the government is currently spending R25 billion more than its tax revenue every month.

The situation deteriorated rapidly over the past two years, declining from a R15-billion deficit to a R25-billion deficit.

“This year’s budget is going to be harsh,” said Schussler. “Other years were tough, but this year will be ‘eina’.”

R14.6bn tax collection deficit for SARS

By Katya Stead for Fin24

The South African Revenue Service (SARS) announced on Monday afternoon that it had collected R1 287.6bn in tax for the financial year ended March 31 2019, some R14.6bn less than what was estimated in the revised Budget.

The tax agency’s acting head, Mark Kingon, made the announcement in Pretoria. The 2019 revised Budget estimated a tax haul of R1 302.2bn for the past financial year.

“It should be noted that these are preliminary results, which will be subject to detailed financial reconciliation and a final audit.” the agency said in a statement.

While SARS collected more tax in total in the year ended March 31, it also paid out more in refunds.

The revenue collection agency said that gross collections grew by 8.6% year-on-year. Refunds recorded an even more impressive annual growth of of 22.7%.

“The gross amount collected is R1 575.4bn, which was offset by refunds of R287.8bn, resulting in net collections of R1 287.6bn. The net revenue outcome of R1 287.6bn represents a growth of R71.2bn (5.8%) compared to the 2017/18 financial year.”

This follows the announcement by the minister of finance during the mini budget that the VAT refund envelope would be increased to allow the release of refunds from the fiscus back into the economy.

VAT refunds for the year totalled R229.2bn, an increase of R38.1bn, or 19.9%, over the previous year.

Speaking at the results release on Monday, Mamiky Leolo, acting group executive of the tax, customs and excise unit at SARS, said the shortfall was near historic proportions. “This is the highest decline we’ve seen since the Great Depression. The deviation is R14.6 billion. I think in terms of the numbers it is a bit of a shock. But statistically, we are 1.1% off. We’ve done a very good job under tough circumstances.”

Despite the shortfall, the agency is targeting a total of R1 422bn in tax revenue collection for the 2019/20 year.

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.

By Sibongile Khumalo for Fin24

Government welcomed the signing of a three-year multi-term Public Service wage agreement, although it exceeded the 2018 Medium Term Expenditure Framework by R30bn.

According to the Department of Public Service and Administration, the R110bn provision for the salary adjustments for the period from 2018/19 to 2020/21 was made in the 2018 Medium Term Expenditure Framework (MTEF).

“The 2018 salary agreement exceeds this amount by R30 Billion over the Medium Term Expenditure Framework,” the department said in a statement.

“This then calls for cost containment measures to ensure that the wage bill remains within the existing compensation ceilings,” it added.

The Public Service Coordinating Bargaining Council (PSCBC) last week said 65.74% of trade unions had agreed to salary adjustments and improvements on conditions of service in the sector for three years, from 2018/19 to 2020/21.

For 2018/19 level 1-7 workers agreed to a 5.5% CPI linked increase, plus a 1.5% , the pay would then be hiked by a CPI related rate for the next two year, with an additional 1%.

Government said the agreement was reached after “a long and difficult negotiations process”.

Employees in the level 8-10 scale would get a CPI rate plus 1% for the current year, followed by 0.5% for the next years, while those in the level 11-12 bracket would receive an increment of 0.5% for this year on top of the CPI. The highest grade will only get a CIP rate for the following year.

Also included, is that the housing allowance of R1 200.00, which would be increased annually by the average CPI of the preceding financial year on an annual basis.

The country’s bulging public wage bill has been a major source of challenge raised by international lenders and rating agencies.

“As government we are glad that we have reached another multi-term agreement,” said Minister of Public Service and Administration Ayanda Dlodlo.

She stressed that the negotiations took place amid growing concerns over the escalating public service wage bill and a contracting economy, which pose serious challenges to the already strained government fiscal purse.

“The agreement proves that it is possible for both parties to reach an amicable agreement that puts the stability of the country and service delivery first.”

The adjustments will be effected on the 1st of July of each year.

Discussions reached a deadlock earlier this week, with the Public Servants Association (PSA) demanding a 12% wage increase across the board. Government offered a 7% increase for lower level workers, 6.5% for mid-level employees and 6% for senior managers.

Unions had started tabling demands in September 2017.

What can SA sell?

A Cabinet committee has changed its tune regarding a plan to sell its full R13-billion stake in Telkom to fund the recapitalisation of South African Airways (SAA) and the SA Post Office, it was revealed at the mini budget last Wednesday.

By selling state-owned assets, Treasury aims to avoid breaching its expenditure ceiling by R3.9bn. This comes after its decision to bail out SAA with a R10bn appropriation and R3.7bn recapitalisation of the Post Office.

The change in tune follows Cabinet’s realisation that the opportunity cost of losing its 39.75% stake in Telkom would be too great.

Now, Cabinet is looking at selling departmental assets and expects a cash windfall from its release of 2.6MHz broadband frequency.

Treasury director general Dondo Mogajane told media on Wednesday that they can’t simply ditch all their Telkom assets. “Telkom is a well-performing share, contributing R900m to R1bn in dividends every year,” he said. “It is important that we hold on to that as much as we can.”

Later, Finance Minister Malusi Gigaba revealed in his mini budget speech that government has “decided to dispose of a portion of government’s Telkom shares, with an option to buy them back at a later stage”.

Hang on to Telkom

In an interview with Fin24 following the speech, Mogajane said government owns many assets which are not being used, which can be sold to limit the amount of Telkom shares they sell.

“We are currently looking throughout the whole of government,” he said. “We are engaging with Public Works, we are engaging with the Department of Rural Development in terms of assets that we have.

“Once we have identified all of those, we will make recommendations to the (Cabinet) committee, which will make these hard decisions to sell based on the quantum of what’s needed.”

This Cabinet committee comprises Gigaba, Economic Development Minister Ebrahim Patel, Public Enterprises Minister Lynne Brown, Telecommunications Minister Siyabonga Cwele and Science and Technology Minister Naledi Pandor.

“Our ceiling, as the books indicate, will be breached by R3.9bn, so we will be looking for assets that will clear that by March 31, so that we remain within the ceiling, even for the current year,” said Mogajane.

“For the MTF (medium-term fiscus), we have confirmed that we will not breach the ceiling and that is the commitment we have made.”

Regarding the release of broadband frequency, Treasury said in its mini budget that “the bulk of additional spectrum is ready to be allocated immediately, without requiring the migration of existing spectrum users to digital television”.

“The delay in allocating telecommunications spectrum constrains growth across the economy. Lack of radio frequency limits the ability of businesses to deploy new technologies and contributes to the high cost of broadband,” it said.

“A well-designed spectrum auction can promote transformation and improve competition as new participants enter the market.

“Universal service conditions can improve access for low-income households. And a competitive auction can sharply reduce data costs.”

By Matthew le Cordeur for Fin24

Gigaba staring into R40bn tax hole

Finance minister Malusi Gigaba faces a gaping budget hole — and will have to consider cutting spending, raising taxes and selling state assets if he wants to avoid further ratings downgrades.

The economy he oversees is hampered by a deteriorating growth outlook, partly stemming from a battle for control of the ruling party that’s stoked political uncertainty and deterred hiring and investment.

Gigaba will outline policy changes in his first mid-term budget speech on Wednesday at a time when economists estimate he confronting a R40bn revenue gap.

There will be push towards moving things off balance sheet. Gigaba is in a very, very hard place and he knows it
“We are entering a very dangerous phase in our budgetary process,” said Lumkile Mondi, an economics lecturer at the University of the Witwatersrand in Johannesburg. “It will be extremely difficult to stick to expenditure ceilings and deficit targets. There will be push towards moving things off balance sheet. Gigaba is in a very, very hard place and he knows it.”

While the minister is encountering political pressure to allocate money to the national airline and other cash-strapped state companies, a failure to keep government debt and the fiscal deficit in check would put South Africa at risk of having its local debt lowered to non-investment grade — a move that may trigger massive fund outflows. S&P Global Ratings and Fitch Ratings cut the nation’s foreign currency debt to junk in April after President Jacob Zuma appointed Gigaba to his post in place of the respected Pravin Gordhan.

Gigaba said in a 12 October interview the economy is going through a rough patch and the government needs measures on the revenue side and the expenditure side to achieve its budget targets.

Challenges

Bloomberg surveys conducted between 12 and 18 October illustrate the extent of the challenges confronting the minister.

The economy is expected to grow by 0.7% this year and 1.2% in 2018, according to the median estimate of 22 economists. That’s well short of the February budget’s forecasts of 1.3% and 2% expansion. The revenue shortfall for the year to March 2018 is set to reach R40bn, the median estimate of 11 economists shows.

The budget deficit for the current fiscal year is seen at 3.7% of GDP, more than half a percentage point higher than the February budget’s forecast, according to the median estimate of 16 economists.

What we do need is a bit of a miracle in December and that the person who comes in just starts cutting the fat
Gigaba may reveal how much money he intends raising through additional taxes and asset sales, while saving the details for next year’s budget speech, said Dennis Dykes, chief economist at Nedbank.

While higher taxes, spending cutbacks and asset sales could help South Africa get a temporary reprieve from ratings companies, the country needs a shift in its fiscal policy, said Arthur Kamp, chief economist at Sanlam Investment Management in Cape Town.

“The treasury can only do so much,” he said. “There has to be a very strong drive in other government departments and state-owned entities to improve governance, to improve efficiency and to improve their financial situations. If that doesn’t happen you will just continuously be looking to sell off the family silver.”

Gigaba’s speech comes less than two months before the ANC is due to elect a new leader, who will also be its presidential candidate in 2019 elections when Zuma steps down. Deputy President Cyril Ramaphosa and Nkosazana Dlamini-Zuma, the former African Union Commission chairwoman and Zuma’s ex-wife, are the front-runners for the post.

“What we do need is a bit of a miracle in December and that the person who comes in just starts cutting the fat,” Dykes said.

Source: TechCentral

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

VAT hike on the cards

The head of EY’s Africa tax practice has called for the finance minister to be bold and increase the Value Added Tax (VAT) rate by two percentage points in February’s budget, arguing that some large companies have long been readying themselves for the costly exercise of changing systems to accommodate a higher rate.

Africa tax practice head Lucia Hlongwane said in an interview this week that basic foodstuffs were already zero-rated to protect the poor and SA’s VAT rate was below the average for the African continent.

She said the VAT rate had been politicised, but the challenge was to bring down the public debt and “we have to take the pain now”.

Most tax practitioners remain convinced that Pravin Gordhan will not go the VAT route to plug the revenue gap when he tables his budget on February 22, with predictions that he will instead get more out of income tax, especially personal income tax, estate duty and a variety of smaller taxes.

“Tax hikes across the spectrum are a must,” Deloitte Africa head of taxation services Nazrien Kader said on Tuesday.

The medium-term budget projected that R28bn of additional tax would need to be raised in 2017-18 even after the expenditure ceiling was reduced by R10bn.

At 14%, SA’s VAT rate is lower than the Africa average of 15.25% and substantially lower than the Organisation for Economic Co-operation and Development’s average of 19.1%.

The Davis tax committee has estimated that an increase of one percentage point would raise an additional R15bn.

Deloitte director Severus Smuts said if the VAT rate were to be hiked, the list of zero-rated items would have to be reviewed to take account of foods households earning R3,000 to R10,000 relied upon.

With SA still at risk of a ratings downgrade, CEO of EY Ajen Sita said while Gordhan “knows how to keep us out of trouble, what we also want to see is new ideas to take us out of our current state”.

Norton Rose Fulbright head of tax Andrew Wellsted said although hikes in capital gains tax and income tax rates at the higher end would not be a surprise, “I don’t think tax will steal the show in this politically charged environment”.

The budget would be closely watched for what the minister would say on spend items such as the nuclear programme, tertiary education fees and National Health Insurance.

By Hilary Joffe for www.businesslive.co.za

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