Later this month, we will have arguably the most important economic event of the year – Finance Minister Pravin Gordhan’s Budget Speech. ZA Confidential is planning to be in Cape Town for the big day, to provide a timely summary of the main highlights. However, in the run-up to the budget, we asked a few of our experts for their expectations and fears…..
Chris Hart of Investment Solutions:
My approach is that, in the context of South Africa, what does the budget do or not do? We look at the government’s own identification of poverty, unemployment and inequality as the three big problems we actually face. We say on inequality that how they take the taxes, in terms of a highly progressive tax take, helps to deal with inequality – and how they spend, with an aggressive re-distribution, helps to alleviate poverty. The two together close the wealth gap. This means that while South Africa may be one of the more unequal societies on a gross basis, it is not on a net basis. However, in doing so the budget has neglected the resolution of unemployment. The problem is better described as an unemployment problem from which there is a poverty and inequality consequence. What the budget does is to focus on poverty alleviation, but does nothing for poverty reduction. This is a critical distinction, because poverty alleviation is shifting resources to consumption, whereas poverty reduction shifts resources to investment. So the past budgets can best be described as welfare budgets where resources are shifted towards consumption – and consequently have been more a hindrance to growth than a support to growth. Now we test the budget on how it is sold, and in the case of the last few budgets they have been sold as growth budgets, designed to produce jobs. You would then expect the government to be focusing resources into investment, and helping to reduce the tax burden. In reality, what the past budgets have actually done is the opposite. If they were sold as welfare budgets, it would have been spot on, but as growth budgets they failed. So when analysing the budgets one asks: how do they take the money? And the progressive nature is something we have to live with as we have a legacy of inequality and poverty to alleviate. When the government is loading on taxes on capital formation or the viability of investment, it becomes extremely damaging – in the context of a country that has a capital deficiency and huge unemployment. Or we would look, if this is a proper growth budget, to the government to constrain consumption expenditure and shift the tax burden towards consumption and alleviate taxes that affect capital formation and investment viability. In the context of South Africa, the taxes that do the most damage are capital gains tax, property transfer duties, and taxes on pension withdrawals and death duties – all of which reduce the ability of households to accumulate capital. In addition, taxes on interest earned, on dividends, and even taxes on rental income reduce the viability of investment in SA. From a job-creating point of view there also needs to be significant relief to small and medium businesses, with respect to the tax administration, red tape and compliance. Because at the moment, small businesses are hobbled by complex red tape that require economies of scale to administer, placing them at huge disadvantage against larger, established businesses. What do I think they will do? Unfortunately the government may well use the budget to look to resolve their own problems primarily, and the country’s problems will probably take second place.
Duane Newman from Cova Advisory:
We have the State of the Nation Address this week which will give us some clues to the Annual National Budget to be delivered by Minister Gordhan at the end of February. The Annual Budget has become relatively predictable over the years. It is clear that tax collections will be under strain due to challenging economic conditions and will most likely be slightly lower than budgeted. I would expect the lower tax collections to be mainly due to lower VAT collections, as lower sales in retail are immediately shown in VAT – while they take longer to reflect in income tax collections. We do expect an announcement on the future of the proposed Carbon Tax. Cova Advisory expects at least a one year delay in the implementation of the tax. We also expect comments on the underspent government grant budget, specifically on the Manufacturing Competitiveness Enhancement Programme. While the approvals under this programme have been over R1b, there have been slower than expected claims by companies, and payment by the dti.
Mike Schussler from economists.co.za:
The Budget deficit will be over 4% for the next two years, as the slow economy means that tax collections will be down – particularly from companies and from the VAT on vehicles sales. Pravin Gordhan is going to struggle to cut spending, as much spending is now entrenched. Moreover Infrastructure investment is going to take a lot of money and government guarantees.. Expect announcement on new taxes such as the Carbon Tax. Overall, I expect very little tax relief from the budget. There should be very small increases in welfare cheque amounts, but increases nonetheless. Many state-owned enterprises will not be able to fully pay back, and this will increase the debt burden on the tax payer. I expect the debt burden to grow as percentage of GDP, and this will be a cause for concern as we move forward – as deficit reduction targets have not been met. This will attract attention from the rating agencies, and we will have another round of downgrading before the next budget in 2015. Growth forecasts will be downgraded and the inflation forecast upgraded. This will be the most difficult budget as the country can no longer put off pulling up its socks. Real fundamental changes are required and more and more people are stating this in public, although much of it is still only at braais and lunches. The cupboard looks bare to start with and he will need some of his magic to make ends meet – even if it is again sleight of hand.
Tweet of the day:
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