Mini Budget - Tax reform set for 2015

Government is set to announce ‘changes to tax policy’ in the 2015 Budget, finance minister Nhanhla Nene said in his Mini Budget Speech today. Nene has kept the details of the changes to the way in which South African’s could be taxed close to his chest.
 
In the Medium Term Budget Policy Statement (MTBPS), Nene said: “In response to the worsening debt outlook, government proposes a fiscal package that reduces the expenditure ceiling and raises tax revenue over the next two years. This will reduce the budget deficit and stabilise debt, which is now set to reach R2.4 trillion in 2017/18.”
 
Under the headline ‘Changes to tax policy and administration’ in the Medium Term Budget Policy Statement MTBPS it stated: “Government proposes a structural increase in revenues over the medium term. Policy and administrative reforms will raise at least R12 billion in 2015/16, R15 billion in 2015/17 and R17 billion in 2017/18. The details of the proposed changes will be announced by the Minister of Finance in February when he tables the 2015 Budget in Parliament.
 
“The proposals will enhance the progressive character of the fiscal system, improve tax efficiency and realise a structural improvement in revenue. The short- and long-term implications for economic growth and job creation will be a key consideration.”
 
But commentators predict that taxpayers could see an end to VAT exemptions, the introduction of a wealth tax and that remaining loopholes in tax avoidance schemes will be closed, meaning wealthy tax payers and corporations will no longer be able to ‘squirrel’ money offshore to avoid paying tax.
 
Earlier this week Investec Asset Management economist and strategist Nazmeera Moola called tax hikes a ‘necessary evil for SA’. “Unfortunately, a lower growth outlook also increases the risk of tax increases. While it is not politically popular, it is difficult to see how the Treasury will get the budget deficit below 3% in the 2016/’17 fiscal year without tax hikes. The only other option is significant cutbacks in spending – which would be good for the economy on the long term – but requires a great deal of political will, which South Africa does not seem to have,” explained Moola.
 
A spending and government headcount freeze
 
Besides adjusting tax policy and administration the government also proposed four other elements of the fiscal package to reinforce sustainability. These include:
 
* A reduction in spending: Government said it will lower its 2014 Budget expenditure celling by R25 billion over the next two years.
 
* Strengthening budget preparation: Government will place greater emphasis on longer-term planning and efficient resource allocation within a fiscal framework that links aggregate expenditure and economic growth beyond the medium term.
 
* A freeze on headcounts: This will include a review on all funded vacancies.
 
* Adopting a deficit-neutral approach to financing state-owned enterprises: Nene has pledged not to bail out state owned enterprises that do not have a robust business plan in place. Private investment to strengthen the balance sheets of state-owned entities will also be explored.
 
Uncertain economic outlook
 
Back in February government expected the economy to grow by 2.7% but Nene said it has since revised this estimate down to 1.4%, adding that Treasury expects growth to reach 3% in 2017.
 
“This downward revision is partly because of weak global environment including the slowdown in Europe, China and other emerging economies. But it also reflects obstacles to our own development: energy constraints, labour market disruptions, skills shortages, administrative shortcomings and difficulties in our industrial transformation,” said Nene in his speech today.
 
Taxpayers won’t bail out African Bank
 
Nene also announced that Treasury has provided R7 billion assurance to the South African Reserve Bank (Sarb) in the event it is needed for African Bank. However, he as well as the out-going governor of the Sarb, Gill Marcus, made assurances that it is unlikely that taxpayer’s money will be used.
 
“In support of the restructuring, the Treasury has provided a R7 billion assurance to the Reserve Bank. Our expectation is that the new African Bank will re-list on the stock exchange early next year and that the curatorship will be concluded without the use of taxpayer money,” said Nene.
 
Marcus, who was present at the press briefing ahead of the Mini Budget Speech, said African Bank was now more stable, was still open for business and granting loans. She said that the bank had specific problems that were unique to it. She relayed her confidence in other financial institutions that specialised in the unsecured personal loan space, adding that it is “sound” and that she has “full confidence” in it. She did, however, admit that lessons could be drawn from African Bank’s experience.
 
Marcus added that the finance industry needed to get the lending criteria balance right. “We need sustainable and affordable access to finance and there should be a strong focus on how debt works and the cost of debt. It [debt] is not just a ‘low earner’ problem,” she said.