Wealthy to fund shortfall
Prudent but redistributive
FINANCE Minister Pravin Gordhan yesterday targeted top earners to fund the country’s revenue shortfall in a balancing act meant to shield the poor from more tax.
He announced tax policy measures to raise R28 billion, mainly through a new top personal income tax bracket of 45 percent for taxable incomes above R1.5 million and a 5 percentage point increase in dividend withholding tax. The new tax bracket will affect about 100 000 taxpayers.
Gordhan said increasing the top marginal rate without raising the dividend withholding tax rate could prompt some taxpayers to pay themselves with dividends instead of salaries. “We believe in a progressive tax system. The tax system is crucial to redistribution in South Africa.”
Gordhan tabled a Budget containing a number of measures to raise additional revenue, which include a higher personal income tax and an increase in dividend withholding tax.
He said that this year, revenue was lagging behind the economy, leading to a R30bn shortfall compared to the budget estimates a year ago.
“The revenue shortfall is mainly in personal income tax, value-added tax and customs duties,” Gordhan said. “This reflects slower growth in wages, employment and bonus payouts last year, among other factors.”
Yesterday’s Budget speech came under slightly different conditions compared to last year, when the risk of the country’s credit downgrading to a sub-investment grade was heightened.
Rising debt Gordhan said the National Treasury had accelerated the pace of fiscal consolidation in in the face of the rising debt and gloomy local and global outlook .
“After several years of tentative economic growth, there are signs that a more sustainable recovery might be under way,” said Gordhan.
He said the South African economy was expected to grow at 1.3 percent this year and 2 percent next year, against the projected 3.4 percent this year and 3.6 percent next year that the International Monetary Fund has estimated for global growth.
However, Standard Chartered Bank’s chief Africa economist Razia Khan described the Budget as disappointing and without any bold measures to deal with current challenges.
Khan said the National Treasury laid out the argument for a VAT hike last year but stepped back from doing anything meaningful.
“Instead, there were a lots of tax changes that might hit the right note politically (like raising the top rate of tax to 45 percent for high-income earners) but are of questionable usefulness in generating the additional revenue that South Africa needs.”
In its Budget review yesterday, the National Treasury said the proposed Budget for 2017/18 totalled R1.56 trillion, of which revenues covered R1.41 trillion.
The Treasury said the remaining R149bn would have to be borrowed.
“To meet current commitments and stabilise the growth of debt, government proposes tax increases totalling R28bn,” the Treasury said.
“The revenue proposals are concentrated at the upper end of the income spectrum, strengthening the progressive character of the fiscal system. Government is acutely aware of the difficult conditions facing the majority South Africans.
“However, deferring taxes by accumulating more public debt would ultimately impose a greater burden on citizens.”
Gordhan was more optimistic about South Africa’s growth prospects, owing to, among others, a rebound in commodity prices, a recovery in the exchange rate, improved electricity supply, fewer production stoppages due to industrial disputes, and an easing in drought conditions.
“In our view, there is a glimmer of hope. The green shoots are discernible. There is still an element of uncertainty in certain areas such as mining,” the minister said in a press conference ahead of his Budget speech.
Spending limits But, in the face of a relatively high government debt – which stands at R2.2 trillion or 50.7 percent of GDP – Gordhan did not take his foot off the accelerator, maintaining a commitment to increase revenue collection while imposing limits on public spending.
“To ignore our fiscal targets would result in interest rate hikes, unsustainable commitments and credit-rating downgrades. This is a scenario in which short-terms gains would quickly give way to financial stress, capital flight and cutbacks in service delivery.”
NKC Africa Economics Insight described the Budget as prudent but highly redistributive in difficult economic conditions. It said tax increases remained the main feature of the Budget. “The new top personal income tax rate of 45 percent for taxable incomes above R1.5m a year is estimated to render an additional R4.4bn in tax revenue in 2017/18, which is 26.4 percent of the additional personal income tax that is budgeted to be collected in total; thus, clearly, high-income earners will be hit hardest.”