By now everyone has had some time to digest the Budget Speech, and specifically how the R28 billion increase in the tax burden that largely falls on individuals will impact us. The new top marginal tax bracket of 45% only applies to 103 000 taxpayers, who will on average pay R3 500 per month more in income tax. There are 7.4 million registered individual taxpayers in South Africa, but  6.5 million fall below the threshold income and don’t pay income tax.
The immediate market reaction to the Budget was fairly positive, but South African markets are so closely connected to global markets that it is often difficult to disentangle domestic from foreign drivers. Ultimately, one wouldn’t expect a big market reaction because the October mini-Budget already gave clear direction; last week was just a case of giving us the details.
Commitment to narrow the deficit
The 2017 Budget retains a commitment to narrowing the budget deficit to an internationally acceptable level of 2.6% of GDP over the medium term and stabilising the government debt to GDP ratio. Fortunately, unlike the previous four years, the global climate is more favourable this year. Global economic activity is speeding up, especially in Europe where economic growth has reached its fastest rate in six years and positive business and consumer sentiment suggests that it will be maintained.
Similarly, Japan is enjoying decent growth (by its standards). US economic growth is strong enough for the Federal Reserve to consider an interest rate increase soon. Commodity prices have firmed up substantially over the past year, and investor sentiment towards emerging markets has improved, reversing the sustained capital outflows of the previous five years. When Minister Gordhan delivered the Budget Speech last year – soon after he was parachuted into the position – the rand was at R15.26 against the US dollar. Last week, it closed at R12.94.
South Africa benefits from all these trends, and the local economic outlook has therefore improved. In the short term, fiscal consolidation is a drag on economic growth, but should not derail this recovery. Whereas the economy barely grew in real terms last year, Treasury expects growth to rise to 2.2% over the next three years. These numbers represent an improvement off a low base, however, and will not dent the unemployment rate.
Perhaps the biggest criticism of the Budget was the lack of reform announcements and measures to stimulate growth. But it is important to remember that the Minister of Finance and the National Treasury control Government’s finances and not economic policy and implementation.
Hurdles for a ratings reprieve
Consider the ratings outlook, for instance. In a recent panel discussion, S&amp;P Global’s local representative reiterated that South Africa’s ratings hinge on three issues. Firstly, expectations for improvement in economic growth and fiscal performance. Secondly, signs of weakening institutions would put downward pressure on ratings since it could lead to a deteriorating investment climate. Thirdly, risks posed to Government’s finances by the State Owned Enterprises (SOEs).
Of the above, the Minister only has direct control over the fiscal performance, and even there not as much as he would like. To begin with, the overall thrust of fiscal policy is a Cabinet decision, not Treasury’s alone. But the actual outcome of fiscal policy is dependent on the performance of the economy. The problem over the past four years has precisely been that the weak economy has put tax revenue under pressure. Complicating matters somewhat is that the economy responds to fiscal policy too. For instance, sharp tax hikes could choke off the nascent recovery. On the other hand, tax incentives can encourage growth and job creation in targeted sectors, as the World Bank recently pointed out.
South Africa’s institutional strength was stress-tested last year. When flimsy charges were brought against Pravin Gordhan, the combination of media freedom, a vibrant civil society and independent courts prevailed. And our central bank was willing to hike rates to maintain its inflation-fighting credentials even though there was an election around the corner. The election itself and the subsequent peaceful transfer of power in key metros also demonstrated the strength of our institutions. Few, however, doubt that 2017 will see further strains as we gear up for the ruling party’s elective conference at year-end. Major policy shifts before the conference are unlikely.
In terms of the SOEs, there is some control by Treasury, since Treasury signs the guarantees that make up Government’s contingent liabilities of around 10% of GDP. But the overall structure, objectives and governance of the SOEs rests with Cabinet, not with Treasury. The financial underperformance of the large SOEs &#8211; the return on equity of the 16 largest SOEs in the 2015/16 fiscal year was only 0.8%, well below any reasonable estimate of the cost of capital &#8211; is not only a drag on the fiscus, it can also hamper economic growth.
It is also important not to lose sight of South Africa’s ratings strengths. These include world-class financial markets and a well-capitalised banking sector. Government is therefore not dependent on borrowing in fickle foreign markets, exposing it to currency swings (foreign debt is only 10% of the R2 trillion total).
As long as economic growth improves in the short term, and provided there is no institutional deterioration, South Africa can hold on to its investment grade rating. This would be a positive surprise, given that global market pricing places us in the same camp as other “junk” economies like Russia and Brazil.
Structural reform needed
Faster economic growth over the longer term is not only important for job creation, it is also necessary for fiscal sustainability as it will lead to growing tax revenues for Government, which can be spent on welfare, education and health without resorting to additional borrowing. Structural reforms to lift the long-term growth rate include lowering barriers of entry to increase competition between firms, providing young people with easier access to the job market, ensuring fewer strikes, improving transport infrastructure, attracting skilled immigrants until such time as our own people are better equipped, effective land reform and greater regulatory certainty, especially in capital-intensive industries like mining.
The first chapter of the Budget Review highlights that 2016 was the first year private fixed investment contracted since global recession, a sign of rock-bottom confidence. It then lists a number of items on Government’s to-do list that could lift investment (including finalising mining regulation, expanding the independent power programme, and concluding analogue to digital migration) where responsibility rests with other departments within Government. Unsaid, of course, is the lack of certainty around the position of the Finance Minister, which has drained business and investor confidence over the past 14 months.
 
Chart 1: Rand-dollar exchange rate
 <img loading="lazy" decoding="async" src="/media/19341300/old_mutual_chart_1_27_feb_2017_598x294.jpg" width="598" height="294" alt="Old Mutual Chart 1 27 Feb 2017"/>﻿
Source: Datastream
 
Chart 2: Projected consolidated budget deficits
<img loading="lazy" decoding="async" src="/media/19341307/old_mutual_chart_2_27_feb_2017.png" width="568" height="265" alt="Old Mutual Chart 2 27 Feb 2017"/>﻿
 
Source: National Treasury﻿

S.A: Beyond the 2017 Budget

The 2017 budget speech takes place at a time when the fiscus is under pressure. Unsurprisingly, the Minister has raised the necessary additional revenue by primarily increasing personal taxes. This comes through in the form of lower bracket creep relief, a new tax bracket for high income earners, a higher dividend withholding tax rate and higher indirect taxes.  All this places greater pressure on consumers and their ability to save while at the same time making tax preferred vehicles, such as retirement funds, all the more attractive. 
We are encouraged by National Treasury’s ongoing initiative to drive retirement and social security reform, as we believe this demonstrates a positive reinforcement of the need to implement measures to encourage retirement savings among South Africans. We welcome the clarity on how the R350 000 cap should be applied, although we would have liked to see this cap increase with inflation.  The ability to preserve benefits post retirement is also a positive move. 
The increase in the annual allowance for Tax Free Savings, which was increased from R30,000 to R33,000 is also pleasing. This is yet another vehicle that individuals can use to avoid dividend withholding tax and capital gains tax. Although the lifetime limit of R500,000 wasn’t mentioned, it is unnecessary at this stage as we’re only entering the third year since its introduction and we trust that this limit will also be adjusted in time.
No update was announced regarding the annuitisation requirement for provident fund members, which formed part of the Tax Laws Amendment Act that was introduced 1 March 2016 but postponed to 1 March 2018. It is encouraging that Government is continuing to engage with key stakeholders to reach a consensus and we trust that a final decision in this regard will be made well before the proposed implementation date of 1 March 2018.
In terms of social security reform, the Government acknowledges in the budget that this will take time to implement and we support the need to seek short-term endeavours to address the chronic underfunding of retirement that South Africa faces.
One such suggestion is compulsory auto-enrolment of employees into a fund by their employers, which would make it compulsory for an employer to offer their employees a retirement fund structure. Our research shows that many South Africans hold a poor view of their current and future financial situation.  This reform, if introduced, has the potential to enable the retirement system to better prepare more South Africans for a financially secure retirement.﻿

S.A's Budget 2017 makes retirement funds attractive

The startling reality about South Africa is that wealth remains highly concentrated – 95% of it is in the hands of 10% of the population. The bottom 20% have benefited from social grants and better access to services, the top 20% from the rising demand for skills and pay increases while those in the middle have been left behind. Unless this is urgently dealt with South Africa is facing a severe crisis.
This was the main message of South Africa’s Finance Minister Pravin Gordhan’s 2017 Budget, which repeatedly highlighted the need for radical transformation aka inclusive growth.
Gordhan argued that perhaps “in the face of such intractable economic hardships and disparities” the time has come to supplement the country’s Constitutional Bill of Rights with a ‘Charter of Economic Rights’”.
Something needs to be done to lift the “Missing Middle” to prosperity, poor people need to be given the opportunity to assemble assets &#8211; the status quo cannot continue, he argued. We need to look at how do we grow the economy with a greater sense of urgency?
According to his Budget speech the charter would bind South Africans to an economy which:
- Provides access to decent and well remunerated jobs,
- Facilitates training and retraining of citizens in the face of technological change, and
- Creates a supportive environment for micro, small and medium businesses and cooperatives.﻿

Time for S.A to consider a “Charter of Economic Rights” – FinMin Gordhan

What you need to know about Budget 2017
South Africa’s Budget 2017 revealed that revenue has lagged behind the economy, leading to R30bn shortfall, to deal with this shortfall several tax changes have been proposed as highlighted below. It also painted an economy in dire need of economic growth. This is also mentioned in this Budget in a nutshell.
New taxes on the way
<ul>
<li>Revenue has lagged behind the economy, leading to R30bn shortfall</li>
<li>Total tax revenue for 2016/17 will be R1.14trn, up 7% on previous year</li>
<li>S.A’s tax proposals will raise an additional R28bn</li>
<li>A wealth tax will be introduced comprising a new top personal income tax rate of 45% for those with taxable incomes above R1.5mn. It is expected to bring in between R3bn-R5bn.</li>
<li>Dividend withholding tax rate to be increased from 15% to 20%</li>
<li>Treasury is looking at share repurchase schemes</li>
<li>Tax free threshold increased from R75 000 to R75 750</li>
<li>Personal tax changes are as follows:<img loading="lazy" decoding="async" src="/media/19338669/personal_tax_598x432.jpg" width="598" height="432" alt="Personal Tax"/>﻿</li>
</ul>
<ul>
<li>Fuel levy to increase 30c/litre and road accident fund levy &#8211; 9c/litre</li>
<li>Excise duties for alcohol and tobacco to increase between 6-10% </li>
<li>Relief will be provided in the affordable housing market</li>
<li>Annual allowance for tax free savings accounts increases from R30 000 to R33 000</li>
<li>Medical tax credit will be increased in line with inflation</li>
<li>Consultations ongoing on tax on sugary beverages </li>
<li>Proposed design of sugar tax has been revised to include both intrinsic and added sugars </li>
<li>Sugar tax will be implemented later this year once details are finalised and legislation passed</li>
<li>Proposed carbon tax &amp; implementation date will be considered in Parliament this year </li>
<li>S.A to sign a multilateral instrument this year</li>
<li>SARS received VDP disclosures totalling R3.8bn in foreign assets</li>
<li>Special VDP will be open until the end of August this year</li>
<li>Multinational companies will be required to file further information with SARS</li>
</ul>
The State of S.A
<ul>
<li>S.A’s income growth has been uneven</li>
<li>95% of S.A’s wealth is in the hands of 10% of the population</li>
<li>35% of the labour force are unemployed</li>
<li>Over half of all children in Grade 5 cannot read adequately in any language</li>
<li>A Charter of Economic Rights needs to be debated to deal with these glaring inequalities </li>
</ul>
The State of S.A’s economy
<ul>
<li>S.A’s growth has been too slow at 1% a yr in real per capita terms</li>
<li>S.A’s transformation will be built through economic participation, partnerships</li>
<li>R28bn to be raised in taxes</li>
<li>S.A’s budget deficit for 2017/18 will be 3.1% of GDP</li>
<li>S.A’s government debt will stabilise at about 48% of GDP over next 3yrs</li>
<li>Spending priorities: Education, health services &amp; municipal functions in rural areas IMF projects world economy to grow by 3.4% in 2017 &amp; 3.6% in 2018 Economic inclusion is being prioritised everywhere S.A’s GDP expected to increase from 0.5% last yr to 1.3% 2017 S.A growth to be spurred by commodity prices rebounding Plans are afoot to get S.A out of the present low growth trap</li>
<li>S.A is finalising legislation relating to mining development &amp; land redistribution</li>
<li>S.A is implementing transition from analogue to digital television</li>
<li>S.A is continuing its independent power producer programme</li>
</ul>
S.A’s 2017 Budget  Allocations:
<ul>
<li>R3.9 billion for small, medium and micro enterprises and cooperatives.</li>
<li>R4.2 billion for industrial infrastructure in special economic zones and industrial parks.</li>
<li>R1.9 billion for broadband implementation.</li>
<li>R3.9 billion for the Council for Scientific and Industrial Research.</li>
<li>An additional R494 million for tourism promotion.</li>
<li>An additional R266m to support the aquaculture sector and realise the goals of the Oceans Economy Phakisa Operation.</li>
<li>Spending on agriculture, rural development and land reform amounting to nearly</li>
<li>R30 billion by 2019/20.</li>
<li>Provincial Roads Maintenance Grant is allocated R10.8 billion in 2017/18</li>
<li>SANRAL receives R15.4 billion over the period</li>
<li>The Department of Telecommunications and Postal Services receives R1.9 billion</li>
<li>The Passenger Rail Agency of South Africa to receive R16.7 billion</li>
<li>Public Transport Network Grant receives R6.2 billion in 2017/18.</li>
<li>R600 million over the medium term is reprioritised to the Social Housing</li>
<li>R18.4 billion over the medium term is allocated to the Regional Bulk Infrastructure Grant</li>
<li>R12.5 billion to the Water Services Infrastructure Grant</li>
<li>R1 billion is added to the local government equitable share in 2018/19</li>
<li>An additional R5bn to the R32bn previously announced has been allocated to higher education</li>
</ul>
The shape of S.A’s finances
<ul>
<li>The proposed expenditure for 2017/18 totals R1.56 trillion</li>
<li>Interest on debt amounts to R169 billion</li>
<li>Projected revenues amount to R1.41 trillion</li>
<li>The balance of R149 billion, or 3.1% of GDP, will be borrowed</li>
<li>S.A’s government debt stands at R2.2 trillion, or 50.7% of GDP</li>
<li>Funds available after providing for debt service costs &amp; contingency reserve up 6.9% to R1.24trn next year; are projected to rise to R1.43 trillion in 2019/20</li>
</ul>
Over the next three years:
<ul>
<li>47.5% of available funds will be allocated to national government</li>
<li>43.4% to provinces and</li>
<li>9.1% to local government</li>
</ul>
Public service wage bill
<ul>
<li>Provincial spending on personnel has declined to just under 60% in 2016/17</li>
</ul>
Social grants
<ul>
<li>Three new conditional grants will take effect in 2017/18</li>
<li>National Treasury &amp; provincial treasuries to focus on four “game changers”</li>
<li>Social assistance grants to be increased in April</li>
</ul>
S.A’s social grant allocations:
<ul>
<li>The old age grant will increase by R90 to R1600 for pensioners over the age of 60, and R1620 for those over 75.</li>
<li>The disability and care dependency grants also increase by R90 to R1600 a month.</li>
<li>Foster care grants increase by R30 to R920 a month.</li>
<li>The child support grant increases by R20 to R380 a month</li>
</ul>
NHI
<ul>
<li>Eleven NHI pilots have yielded valuable insights, on which to build</li>
<li>NHI Fund will be established</li>
</ul>
Education
<ul>
<li>Spending on basic education next year will be over R240bn</li>
<li>The Heher Commission of Inquiry into Higher Education will complete work by June</li>
</ul>
Procurement
<ul>
<li>Public procurement will amount to about R1.5trn over next 3yrs</li>
<li>Further procurement reforms to be introduced this year</li>
<li>Draft Public Procurement Bill to be published shortly</li>
</ul>
Forex collusion among banks
<ul>
<li>Market conduct regulator proposed</li>
<li>Banks need tougher rules to cover financial market abuses</li>
<li>SARB &amp; Treasury have initiated work on a more comprehensive Financial Markets Review Financial Sector Summit to take place in 2017 ﻿</li>
</ul>

Budget highlights 2017: How it affects you

All South Africans, especially the wealthy, had best tighten their belts.
“Slow economic growth has held us back and so decisive steps are needed to strengthen confidence, investment and growth.”
This was one of the key messages on tax given by Pravin Gordhan, Minister of Finance, during his 2017 Budget Speech in Parliament, in Cape Town today.
This year’s budget has to tackle a pesky problem &#8211; economic growth has shown ‘green roots’, with a 1,3% estimated growth in 2017, but it is not sufficient to address unemployment and poverty. 
“Government debt now stands at R2, 2 trillion, or 50.7% of GDP, interest payments are a rising share of expenditure. By acting now to stabilize debt we will ensure that future generations will not pay for today’s expenses, 20 or 30 years from now.”
It means Gordhan needed to raise R28 billion as well as reduce expenditure by R10 billion over the next year to ensure a sustainable recovery.  The concern of those in the streets was how government intended to raise it.
Those who will be hardest hit are the wealthy. People earning more than R1, 5million will now pay 45% personal tax. There will also be a 5% increase in dividends paid out to owners of companies to 20%, up from 15%.
“Wealth remains highly concentrated – 95% of wealth is in the hands of 10% of the population.” 
South Africans driving fuel guzzler vehicles will also be digging deeper into their wallets. Petrol will rise by 30c/liter under the general fuel levy, as well as an increase of 9c/liter will go towards the road accidents fund.    
Sin taxes, like alcohol and tobacco, also took a hit with increases of between 6% and 10%.
Two new levies will also be rolled out once they have been finalized in Parliament. A levy on sugary beverages will charge 2.1c per gram of sugar content above 4g per 100ml. While a proposed carbon tax, is still undergoing consideration.  
There is some relief. Medical tax credit rose with inflation. For the low income earner the tax free threshold was raised from R75,000 to R75,750. Those looking to invest their money in tax free savings accounts now have an annual allowance of R33,000, with no increase to their limits,  and the affordable housing threshold above which transfer duty is paid was moved from R750,000 to R900,000.
“For many years we have enjoyed the benefit of tax revenue collections outstripping economic growth. This contributed to expand public service delivery. This year, revenue has lagged behind the economy, leading to a R30 billion shortfall” says Gordhan.
The government has a tough budgetary juggling task ahead of them. High on their agenda is bailing out state owned enterprise South African Airways and the post office.  Financial management of Provinces have also undergone reviews, to eliminate ‘duplication of activities’; reduce spending on non-core goods and non-essential services.
“Though the fiscal envelope is constrained, billions of rands have been shifted to meet new needs. A substantial additional allocation to higher education is again proposed, adding R5 billion to the R32 billion previously announced.”
Government plans to clamp down on tax avoidance. This year government intends to sign a multilateral instrument to reduce the scope of aggressive tax avoidance activities. This includes automatic exchange of information between tax authorities and requiring multinational companies file detailed information with SARS on cross border activities.
“We rely on global cooperation to address trade imbalances, the abuse of tax havens and the coordination of financial stabilization efforts.”  
Gordhan says that SARS received disclosures of R3,8 billion in foreign assets, which will yield about R600 million, under the Special Voluntary Disclosure Programme which ends in August.
“Across all three spheres of government, and in state owned companies and public entities, those responsible for deciding how money is spent have to do so with scrupulous rigor and care. It is only right that is households and firms face tough choices in balancing their income and expenses; the same disciplines must be applied in public expenditure,” says Gordhan.
“…we face immense transformation challenges – we must overcome the inequalities and divisions of our societies. All South Africans must share in a more prosperous future.”
Tough times ahead for state and citizen alike.  ﻿

A R28-billion taxing problem

In his 2017 Budget speech, South Africa’s Finance Minister, Pravin Gordhan, highlighted the importance of reforming troubled State Owned Companies (SOCs) in the restructuring and strengthening of the country’s economy.
In recent times, many of South Africa’s SOCs have been struggling financial, often turning to National Treasury for billions in bailouts.
Speaking in parliament on Wednesday, Gordhan stated that the country’s Cabinet has endorsed a series of measures to reinforce governance and accountability in these SOCs.
“This imposes substantial obligations and responsibilities on boards and senior managers. We expect the highest standards of ethical leadership and understanding,” says Gordhan.
The Finance Minister says he met with members of the board of South African Airways, which has been on the spotlight in recent times for their alleged mismanagement of finances.
In a media briefing hours before Gordhan tabled the budget to parliament, he told journalist in attendance that the South African Airways chairperson, Dudu Myeni, couldn’t avail herself for the meeting.
“I met some board members nonetheless and I am positive about the turnaround strategy of SAA. They are now in the process of finding a suitable CEO and CFO for the company,” says Gordhan.
The director General of National Treasury stated that both the Post Office and SAA needed “substantial” capital injections which will have to be paid out in installments over a certain period. He further stated that the amount will be determined by October when the minister tables the mid-term budget.
In his budget speech, Gordhan stated that with a combined asset base of R1.2 trillion, the SOC’s are well-placed to partner with private sector investors in growing the productive capacity and infrastructure of South Africa.
“But they must be financially strong, governance must be sound, and boards and executives must have the necessary competencies to run complex business enterprises,” says Gordhan.﻿

S.A’s Finance Minister emphasises the importance of reforming troubled SOCs

The relationship between labour and capital, rich and poor, black and white, still reflect the entrenched legacy of colonialism.
This was the word from South Africa’s Finance Minister, Pravin Gordhan, as he tabled the 2017 budget in parliament, Cape Town. A large portion of Gordhan’s speech addressed the lack of transformation in South Africa.
“Wealth is produced and allocated along the lines that remain fundamentally unjust. The ownership of assets and the distribution of income is captured by a minority of the population, a situation that is morally wrong and economically unsustainable,” says Gordhan.
The lack of transformation in South Africa has been a thorn on the side of the country for the last 23 democratic years with almost all the country’s industries still owned by a minority of the population.
The Finance Minister highlighted the importance of bridging the inequality gap in South Africa. He went on to agree with President Jacob Zuma on finding a new perspective for economic transformation.
“The litmus test for our programmes must be what they do to create jobs, eliminate poverty and narrow the inequality gap. Transformation must be mass-based, benefitting the most disadvantaged South Africans through the creation of new assets, capabilities and opportunities to build livelihoods,” says Gordhan.
Gordhan acknowledged the need to mobilize both private and public investment in social and economic infrastructure, new technologies and new activities that help build a modern and diversified economy.
“Our growth challenge is intertwined with our transformation imperative. We need to transform in order to grow, we need to grow in order to trandsform. Without transformation, growth will reinforce inequality and without growth, transformation will be distorted by patronage.” ﻿

S.A’s lack of transformation is morally wrong and economically unsustainable-Fin Min

South Africa’s National Treasury is set to allocate over R44 billion in the Medium Term Economic Framework (MTEF) to support economic growth in various programmes.
This was In Finance Minister Pravin Gordhan’s speech, tabled to parliament in Cape Town on Wednesday where he urged co-operation from society as a whole.
 “Progress in engagements between government, the business sector and social stakeholders is imperative,” says Gordhan.
The funds allocated to the MTEF period are as follows:
&#8211;          R3.9 billion for small, medium and micro enterprises and cooperatives.
&#8211;          R4.2 billion for industrial infrastructure in special economic zones and industrial parks.
&#8211;          R1.9 billion for broadband implementation.
&#8211;          R3.9 billion for Scientific and Industrial Research.
&#8211;          An additional R494 million for tourism promotion.
&#8211;          An additional R266 million to support the aquaculture sector and realise the goals of the Oceans Economy Phakisa Operation.
&#8211;          Spending on agriculture, rural development and land reform amounting to nearly R30 billion by 2019/20.
“Effective implementation of these and other programmes and initiatives will set us on a higher growth trajectory than currently projected,” says Gordhan.
The Finance Minister expects higher growth in the coming year. He went on to highlight South Africa’s current economic state and challenges:
&#8211;          The services sector was the main contributor to growth in 2016, bringing nearly 120 000 new working opportunities.
&#8211;          Mining continued to underperform while manufacturing output was supported by buoyant sales in petrochemicals, food and beverages and motor vehicles. Mining and manufacturing employment declined by 8 000 jobs in 2016.
&#8211;          Weak business confidence and low levels of profitability weighed on investment across all sectors.
&#8211;          Though the policy interest rate has increased by 2 percentage points since 2014, inflation ended the year above the target, with food prices continuing to reflect the impact on agriculture of poor rainfall.
&#8211;          Lower growth in our trading partners in Africa and elsewhere has contributed to sluggish export earnings.﻿

Over R44 billion allocated to fund South Africa’s MTEF

Since 2009, National Treasury has embarked on fiscal expansion to enhance the public sector’s infrastructure programme and support future economic capacity in South Africa. However, anaemic global economic growth over the last nine years has left the Treasury’s countercyclical expenditure programme unable to lift the GDP growth above 2% per annum.
Consequently, a combination of slow growth and lower tax buoyancy have reduced the in-year 2016/17 revenue estimate by R23 billion. Without policy adjustments, gross tax revenue will – this financial year – fall short of Budget 2016 estimates by R36 billion for 2017/18 and R52 billion for 2018/19. These budget deficits are leaving South Africa’s sovereign rating on the brink of being downgraded to non-investment grade.
 In order to mitigate against this revenue shortfall, Minister of Finance, Pravin Gordhan, announced in his 2016 Medium-term Budget Policy Statement (MTBPS) that an additional R13 billion for 2017/18 and an additional R43 billion over the Medium Term Expenditure Framework (MTEF) will have to be sourced through various tax increases.
In this article, we explore the Minister’s possible tax options to raise the required tax revenue and close the revenue shortfall.
Personal Income Tax (PIT)
Revenue potential: R7.5 billion &#8211; R10.0 billion
PIT accounts for at least 35% of tax revenue. It is largest source of tax revenue and the most buoyant since 2010. This is due to higher-than-inflation wage increases, tax increases and reduced tax relief. South Africa has a progressive tax system, which means higher income individuals pay a higher proportion of tax. Consequentially, this means if Minister Gordhan were to generate significantly higher revenue, he would have to increase taxes for higher income earners. ﻿
<img loading="lazy" decoding="async" src="/media/19332555/graphic_1_598x336.jpg" width="598" height="336" alt="Graphic 1"/>﻿
One option to raise additional revenue is to introduce a 45% marginal tax rate for individuals earning above R1.5 million per annum. Based on preliminary calculations, Treasury can realise between R7.5 billion and R10.0 billion using this option. However, high income individuals are often skilled and mobile. A punitive tax rate might encourage aggressive tax planning or incentivise them to relocate to countries with lower tax rates.﻿
Corporate Income Tax (CIT)
Revenue potential: R0.0 billion
In the current weak macro-economic environment, Treasury is unlikely to increase CIT, as this could result in base erosion, capital flight and hence generate little revenue. Furthermore, increasing the CIT rate will be uncompetitive. South Africa’s current statutory tax rate is already higher than most tax jurisdictions. (See below). However, there is room for Treasury to lower the tax rate to attract investment and send a business friendly signal.﻿
<img loading="lazy" decoding="async" src="/media/19332562/graphic_2_597x336.jpg" width="597" height="336" alt="Graphic 2"/>﻿
Value-added Tax (VAT)
Revenue potential: R0.0 &#8211; R15.0 billion
South Africa’s VAT rate is relatively low compared to most tax jurisdictions and there is less risk of tax avoidance and tax planning associated with this tax (see below).﻿
<img loading="lazy" decoding="async" src="/media/19332569/graphic_3_597x336.jpg" width="597" height="336" alt="Graphic 3"/>﻿
Preliminary calculations by KPMG suggest that a 1 percentage point increase in VAT could yield approximately R15 billion in additional revenue. However, the Davies Tax Commission First Interim report on VAT<a href="#_ftn1" title="">[1]</a>highlighted that an increase in VAT will have a negative impact on inequality, real GDP growth and inflation. Furthermore, VAT increases will be disliked by labour unions. Despite a high revenue yield these factors make a VAT increase
<div>Specific Excise Tax
Revenue potential: R5.0 billion &#8211; R7.0 billion
Treasury is likely to realise additional revenue through higher-than-inflation adjustments in sin taxes, particularly in luxury products like cigars, spirits and wines. In Budget 2016, this raised an additional R2.3 billion. However, disproportionate increases in specific excise taxes might encourage black market consumption. ﻿
<div><img loading="lazy" decoding="async" src="/media/19332576/graphic_4_597x336.jpg" width="597" height="336" alt="Graphic 4"/>﻿</div>
<div></div>
<div>
Furthermore, a new specific excise duty on sugar-sweetened beverages (SSBs) was announced in 2016 and could generate approximately R2.5 billion to R4.0 billion. However, this tax will be introduced at a higher effective tax rate than most other countries that have a comparable tax and is set at higher rates than most wines and spirits in South Africa. Furthermore, any job losses and impact on industry growth will have negative second round effects for the PIT and CIT tax bases.﻿
Fuel levy
Revenue Potential: R5.0 billion &#8211; R7.0 billion 
Treasury is also likely to increase the fuel levy. However, with higher crude oil prices the Minister will not have the same space to increase fuel levy compared to the last two budget periods, where he raised R6.6 billion and R6.8 billion, respectively.﻿
Other adjustments
Additionally, the Minister has the option of progressively providing reduced tax relief to raise short-term revenue. In Budget 2016, Treasury raised R7.6 billion through this option. However, failure to give tax relief over a sustained period is regressive, as lower income groups are disproportionately hurt by an increased tax burden. We also expect the Minister to announce other progressive adjustments to wealth-related taxes, similar to last year’s changes to property taxes. ﻿
Conclusion
While it is impossible to predict the exact adjustments the Minister will announce, above we outline several possible tax adjustments to raise the required revenue. We expect a combination of these tax measures to raise at least R13 billion in the 2017/18 fiscal year.﻿
  
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<a href="#_ftnref1" title="">[1]</a> Davis Tax Committee: Value-Added Tax &#8211; First interim report, 2015﻿
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