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Nene needs a magic wand to conjure up wealth

Eugene du Plessis Eugene du Plessis

Finance Minister Nhlanhla Nene will need to reach deep into his top hat to conjure up magic on February 25 when he presents the National Budget Speech for 2015/16.

His unenviable task? To conjure up wealth out of very little.

“The Minister faces a tough undertaking and will need to be a master magician if he’s to come up with a budget that boosts our sluggish economy, addresses government debt and balances all the competing demands,” says Eugene du Plessis, partner and head of Tax at Grant Thornton Johannesburg.

Government debt has risen dramatically and Nene predicts a R10-billion shortfall in revenue collection this year.

“The taxman will need to collect additionally around R15-billion annually for the next two to three years to make up for the expected shortfall in revenue collection,” says du Plessis. “At the same time, government is determined not to impact negatively on job creation, so taxes need to be cleverly manipulated to meet these objectives.”

Du Plessis predicts that we’re most likely to see real increases in individual tax this year, something that hasn’t happened over the last decade, barring increases in CGT rates..

In his Mid-Term Budget Policy Statement during October last year, Nene said fiscal consolidation could no longer be postponed. There’s therefore no doubt that he’ll announce some serious – if not austere – measures towards the end of this month. These are likely to include some of the following options: higher taxes for the wealthy, an increased fuel levy, changes to the VAT rate, the selling of non-core state-owned assets and stricter cost-cutting measures for government departments.

“The minister has a difficult act to perform,” says du Plessis. “On the one hand, he must collect more revenue. On the other, he can do nothing that may stunt the economy or hinder job creation. This doesn’t require mere juggling. It requires outright magic. In this, his first budget speech, he needs to join the ranks of David Copperfield and Harry Houdini and is really going to have to pull a rabbit out of the hat.”

Du Plessis does not believe Nene will increase company taxes as the economy is not growing and profits are falling. His ability to manoeuvre is very restricted and he will unfortunately have to look to increases in individual taxes instead.

“Chances are he’ll go for higher taxes, targeted at high- net-worth individuals,” he says. “He’ll do this either by increasing tax brackets or opting for higher marginal tax percentages. In this environment, his only real solution is to take from the rich to give to the poor.”

Of the millions of registered taxpayers in South Africa, less than half actually pay tax and the current state of the economy is doing nothing to grow this tax base.

Studies have shown that VAT increases adversely affect the poor, so Nene is unlikely to introduce a flat increase. If he does change VAT, he is more likely to introduce the dual rate system practised by several western countries, in which higher VAT rates apply to luxury, high-end goods. Looked at strictly in isolation, without considering all the ‘hidden’ taxes built into everyday life, the South African VAT rate of 14% compares favourably to many other regions, including the BRIC countries (avg. 16.8%), the EU (avg. 21.4%) and the OECD countries (avg. 19.1%).

Lower petrol prices, as a result of the recent fall in the oil price, have meant real short-term savings for motorists. Du Plessis suggests that the Minister may take this opportunity to increase the fuel levy at a rate that’s higher than has been seen in past years.

“The lower fuel price would soften the blow for motorists, and again, this would probably adversely impact the wealthy to a greater extent than it would the poor,” says du Plessis.

Government debt to GDP in South Africa is now in the region of 46%. This is already at a very high level and it is most likely going to widen further because Nene needs to conjure up the funding for several underperforming state-owned enterprises, of which Eskom is in the direst need.

“The Minister has previously mentioned selling state enterprises to fund Eskom, but we haven’t seen any ‘For Sale’ notices up yet. A move to fund Eskom’s requirements by selling state-owned assets would be widely welcomed,” says du Plessis. “Hopefully this will part fund the R23billion commitment the President referred to in his State of the Nation Address (SONA) last week. The success of SAA’s new 90 day turnaround strategy announced by the President will hopefully positively affect its dependency on state intervention.”

During the MTBPS in October 2014, Nene also talked about freezing pay rises and cancelling vacancies that have remained open for long periods in government departments.

“The Minister has announced his intention to focus on cost cutting within government and we all hope to see a further clamp-down on government spending,” says du Plessis. “I would urge the Minister to share real examples of how government has been implementing cost-cutting over the past few years, as well as some examples of notable improvements.”

All eyes will be on the new Minister come February 25.
Trevor Manuel became finance minister at a time when South Africa was riding the crest of the wave. He helped reduce state debt and guided South Africa through the economic recession. Pravin Gordhan came in at the downturn, facing steady increases in debt and an economy shuffling to a halt. He, however, had room to move because he had greater access to borrowings.

Nhlanhla Nene has arrived to face the worst of it: low economic growth, unprecedented power problems, negative credit ratings and massive state debt. The economy is not growing for a variety of reasons and Eskom is adding an enormous additional burden. Both the cost of funding, and our dependency thereon, are going up. The President’s nine point plan announced during the SONA is ambitious and is sure to require adequate funding and proper execution if it is to deliver on its promises.

“He came across well as he delivered his Medium Term Budget Policy Statement but the Budget Speech will be his first major stage show and he’s going to have to turn more than a few tricks,” says du Plessis.

“It won’t be enough to merely juggle – he’ll need to work the kind of magic that makes everybody happy. We don’t want a budget that has us falling out of our chairs in shock,” concludes du Plessis.