Tax hikes is the main lever the Finance Ministry has used to respond to the challenges faced by South Africa. Debt accumulation, while the Treasury remain committed to keeping it within sustainable levels, has intensified with projections having deteriorated from the 2015 Budget estimates. Economic growth forecasts have been revised downwards while inflation expectations are materially higher. On the expenditure side, the public sector wage bill has been the main focus.
[Read S.A Finance Minister Pravin Gordhan’s 2016 Budget Speech here: http://ow.ly/YH3Tt]
Capital gains taxes have effectively been increased by 3 percentage points (from 14% to 16%) for individuals, 4 percentage points (from 19% to 22%) for companies and 6 percentage points for trusts.
In the real estate sector, transfer duty for home sales more than R10 million have been increased by 2 percentage points (from 11% to 13%). In addition to these, the fuel levy has been increased by 30 cents a litre.
Two new taxes have been introduced for the first time in South Africa: a tyre levy to finance inter alia recycling programs and a tax on sugar-sweetened beverages. Effectively South Africans will pay a tax for buying car tyres and also for consuming beverages such as Coke.
The Ministry of Finance through its interaction within G20 project on base erosion and profit shifting looking into ways to limit tax revenue loss from companies which evade tax through transfer pricing abuses, misuses of tax treaties and illegal money flows.
Perils of debt
Due to the depreciation of the rand and higher interest rates, debt-servicing costs have become the fastest growing item of expenditure and income. In a nutshell, for every rand earned by the state, 12 cents is paid in as interest costs. At the same time, the total stock of government debt will exceed R2 trillion in the medium term.
In the previous Budget, net debt to GDP ratio was forecast to stabilize around 44% in the next three year but has subsequently been revised upwards to consolidate 2 percentage points higher at 46%. The headline (or gross) government debt/GDP ratio which is closely monitored by investors and rating agencies has increased to 51% from 49%. The deterioration in nominal GDP (denominator) has negatively contributed in the worsening ratios.
The portion of debt denominated in foreign currency remains low for SA at 10% of total debt. The Treasury has showed that non-residents now hold 32% of SA debt which is a notable decline from the 36.4% peak in 2013. It appears foreign investors have sold SA bonds, especially during the latter part of 2015.
The Treasury has pushed lower its expenditure ceiling in response to potentially weaker tax revenues in the future. It also has confirmed that the pace of hiring, especially at the provincial level, has slowed. However, the public sector wage bill remains elevated as the agreements on salary increase are negotiated for a three year period.
South African runs a fully funded pension system. The Government Employees Pension Fund (GEPF) with assets around R1.4 trillion provides retirement security to about 1.3 members. Treasury has shown that an increase of 1% on the wage bill, results with an increase of pension liabilities of about R9 billion.
The establishment of the BRICS Development Bank has come at a cost for member states. Each of the 5 members are expected to make US$2 billion capital contributions. South Africa’s contribution is scheduled to be paid over 7 years. So far US$150 million has been paid from the funds raised through the sale of government’s stake in Vodacom.
Treasury has invited South Africans who are tax non-compliant on their offshore investments to participate in the newly announced Special Voluntary Disclosure Programme. Individuals and companies, upon lodging an application, receive tax relief under the program which will last for six months beginning in October 2016 to march 2017.
The big question raised going into this Budget was whether the Minister will be able to turn the tide on the spiraling negative sentiment towards SA and especially on whether a downgrade on SA debt into non-investment grade will be averted. Tax hikes will improve the fiscus in the short-term. However, given that capital gains tax increases have the potential to discourage investments, and also that there were minimal structural reforms announced, the jury is still out on whether the economy can withstand a tighter fiscal and monetary policy.