Tax hike likely to follow lower GDP forecast
FINANCE Minister Nhlanhla Nene delivered his medium-term budget policy statement on October 21. This is against the downgraded global growth forecast of 3.1% for 2015 (compared to 3.4% for 2016).
In February SA’s economic growth was forecasted at about 2% for this year and 2.4% for next year.
The budget revised SA’s growth figures down to 1.5% for this year and 1.7% for next year. The IMF downgraded SA’s growth forecast to 1.4% for 2015, 1.3% for 2016 and 2.0% in 2017.
Downgraded GDP growth forecasts will affect revenue collection and place more weight on lowering expenditure and increasing tax. However, SA will probably maintain its investment rating. The growth rate was revised down due to electricity constraints, lower investment growth (1.2% for this year), and falling commodity prices.
We will see a much higher government wage over the period of the medium-term expenditure framework than projected in February. The average inflation rate for 2015 has mostly not met monthly targets and economists expect inflation to increase to the mid-5% to 6% range next year.
The financial state of SA’s stateowned enterprises could continue to be a problem.
The latest rand/dollar exchange rate hovers around R13.32, compared to R11.08, which is about 20% higher year on year. Lower natural resource prices severely affects SA but is at least countered to some extent by a weaker exchange rate for exports.
The budget deficit has narrowed and is expected to be 3.8% of GDP this year and 3% expected over the medium term. Government debt increased from 26% of GDP (postrecession) to 47% in March and will rise by another R600bn over the next three years.
Government salaries and benefits will be 10.1% higher than budgeted and will be 2% higher than inflation in the next two years. Government spending is expected to grow at 7.2% over the medium term which is still higher than inflation.
Gross tax revenue has been revised down by R7.6bn for this year and R35bn over the three-year period. Corporate tax revenues did not grow as expected, probably due to lower global and domestic growth and increasing input costs. This is likely to continue.
Personal income tax exceeded projections but may be affected by low growth. VAT collections matched projections, but will probably decline (relatively) if growth remains under pressure. Fuel levies exceeded projections. The medium-term budget referred briefly to the Davis Tax Commission work on base erosion and profit shifting, small business taxation, transfer pricing, estate duty, VAT and mining taxation.
Although a VAT increase could boost tax revenues in the most efficient way (estimated at R15bn for every 1% VAT increase), the political agenda and a deterioration in economic outlook may act against a VAT increase. Although increases in estate duty will not generate any significant revenues, it may be considered politically. Compared to an increase in the VAT rate, an increase in personal income tax (at higher income levels) will also not generate strong revenues, but may be an option that government would consider. Detailed changes will only be announced in February.
In summary, tax increases seem to be almost a given in February next year and could likely include personal income tax and estate duty, with a slight chance of VAT increases. SA’s investment rating will for now probably remain unchanged.
Government will continue to invest in investment attraction mechanisms. Government has revised growth forecasts downwards. National departments’ salaries are adjusted by R1.2bn and provinces by R3.8bn. Nearly R13bn will be added to social assistance budgets over the next three years, and health will grow by 8.3% between 2015-16 and 2018-9. Basic education will also grow by 8.2%.
Overall, the picture does not seem to be that bleak and the deficit that would need to be plugged with tax increases in February may not be as high as expected. Government should now have disciplined actions to not increase government spending by more than inflation.
Gloomy forecasts will place more weight on raising taxes, lowering expenditure
Ferdie Schneider is head of tax at BDO South Africa.