15 February 2018

#Budget2018: Here’s what to expect

My Money Matters |

There has been much speculation about what will be revealed when our Minister of Finance, Malusi Gigaba, delivers the annual Budget Speech on 21 February. And with markets reacting positively to the election of Cyril Ramaphosa as South Africa’s 5th President, all eyes – local and international – will be on Parliament this Wednesday.  So, since many of the announcements are likely to affect your pocket and life in some way, now is the best time to get clued up on what you can expect.

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With an economic downgrade to junk status, an ever-changing political climate, and a slowly growing economy that’s under pressure from mounting government debt, many economists reckon that now is the time for tougher measures. Craig Pheiffer, Chief Investment Strategist at Absa Stockbrokers & Portfolio Management agrees. “The bottom line on this one is that it’s going to be really tight for consumers. We’re not going to get much at all,” he started. “The disposable income of an average South African has been under pressure for the past few years because of rising interest rates and inflation. This is probably not going to get better anytime soon, which means that the less money people have to spend, the less money gets pushed back into the economy. This has far-reaching implications for economic growth.”

Pheiffer also explained that he expects this year’s Budget Speech to contain many measures to increase revenue and cut back on expenditure – including some drastic ones. “Just filling the holes with temporary solutions isn’t good enough anymore.”

His colleague, Tsitsi Hatendi-Matika, Head of Retail Investment at Absa Wealth and Investment Management, agrees that Minister Gigaba’s biggest challenge is to deal with the fact that the National Treasury is about R50 billion short.

According to them these measures could include one of the following scenarios:

  • Higher VAT or variable VAT rates:

At the moment, there are two VAT categories: Zero-rated items for which you don’t pay any additional amount towards VAT. This is meant to help the poorest South Africans get by a little easier and includes necessities such as milk, maize, eggs and brown bread. On the other hand, we have other items and services on which we pay 14% towards VAT. So, according to both Pheiffer and Hatendi-Matika one of the possible Budget Speech outcomes is seeing VAT adjustments.  Pheiffer suspects that the introduction of an additional ‘VAT bracket’ is the most likely solution. This means that we would have to pay a higher percentage of VAT (as much as 20% for example) on perceived luxury goods that cost more than a specified amount.

“It just won’t be politically acceptable to increase the VAT rate across the board on all items because of the massive effect this would have on the poor,” Pheiffer explained. “Yet, VAT currently accounts for 25% of the overall budget revenue and is probably the most effective tax lever to pull, through a higher overall rate or a new higher luxury good rate, to generate additional revenue to help reduce government debt.” The Davis Tax Commission found disfavour with a luxury good VAT rate but one can’t rule out the possibility completely.

At the same time Hatendi-Matika added that an overall VAT increase would solve the shortage of funds quicker. “ VAT has been a lever that the National Treasury refused to pull for years, likely because of its political consequences. But a 2%increase in VAT would create the much required cash. This increase is expected to signal government’s commitment to addressing the issue of fiscal slippage,” she explained.

  • Restructuring the way fuel is taxed:

We currently have a zero rating on fuel, which means that we don’t pay any VAT on petrol or diesel. We do however pay fuel levies – which is a few rands that’s added to the amount that you pay for every litre of fuel that you need.  According to both Pheiffer and Hatendi-Matika adding VAT to this total is also a tricky solution. “They would either have to take the fuel levy away and replace it with VAT, but I don’t know how much extra revenue they’ll actually get from that. Another option, of course, is to just add an additional VAT amount on top of the amount that we currently pay for petrol and diesel at the pump,” he elaborated.

Apart from these, Pheiffer and Hatendi-Matika explained that the following announcements could also be made:

  • The introduction of wealth tax:

In order to shield the poorest South Africans from the rising cost of living and expenses, they predict that government might introduce something along the lines of a wealth tax. “The Davis Tax Committee has studied alternatives available with respect to taxing the wealthy in many different ways, and it had an opinion, which was against measures such as a luxury rate of VAT. On the upper end of the tax spectrum, tax rates are 45%, which is viewed by some as punitive. In a country like South Africa where the top 5% of the wealth bracket carries the bulk of the tax burden, the risk of the top end retaliating against further taxes is becoming a reality,” Hatendi-Matika explained.

Pheiffer added that this could also mean that wealthy people could possibly be asked to make an annual payment tax on the sum of their assets. “In an economy that’s got such a wide income inequality, this would be a more socially acceptable thing to do. You could squeeze a bit more out of the wealthy, but it’s not going to really make an impactful difference on the budget,” he said.

  • Small adjustments to personal income tax brackets:

According to Pheiffer small tweaks to personal income tax brackets are more likely than a wealth tax, though. But we shouldn’t expect drastic changes. “Last year a new tax bracket was introduced for high income groups who earn more than R1.5 million per year, so although not impossible, it’s questionable  whether they’ll create another additional bracket the next year,” Pheiffer said. “I do however expect that they’ll marginally adjust the existing tax brackets to provide relief to lower income groups but the less than inflation increase would suite Treasury rather than taxpayers.”

  • An increase in the annual tax-free savings allowance:

The current threshold for tax-free savings is R33 000 per year. This means that you are allowed to save this amount every year, without ever having to pay any tax on these savings.. This annual amount was increased by 10% in the previous Budget Speech and Pheiffer says that it will probably only be marginally increased this time around, if at all.

Apart from these topics, Pheiffer also added that he’s expecting updates on free tertiary education and how it will be funded, in a sustainable manner. This comes after President Jacob Zuma made promises and remarks around that at the ANC’s annual NEC meeting earlier this year. “It’s a massive balancing act at the moment. They definitely have to say something about this because they need to fulfil on the president’s promises and the students’ needs without collapsing the budget as a result.”

While Hatendi-Matika underlined the fact that governance issues and clarity around the funding of State-owned companies (SOCs), namely Eskom, SAA and the Post office also remains a top priority. “Close to R35 billion is required in bailouts, with Eskom taking up around R20 billion of this amount. The SOCs have put a major strain on contingent liabilities, as the government continues to give guarantees when these entities borrow. This has been the focal point of concerns raised by international rating agencies,” she explained.

Pheiffer added that the public sector wage bill is the big elephant in the room. “A substantial chunk of planned expenditure is directed towards the wages of a bloated public sector and the problem is that if Treasury were to cut back on this, it would either mean cutting jobs, lower rates of wage increase, or not replacing vacancies brought about by retirements. It’s the only way to do it, but none of these options would go down well, so, I’m pretty sure that it won’t happen anytime soon,” he explained.

Got any questions? Comment below and we’ll get one of our economists to get back to you with an answer.

Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.

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