Cape Town - With economic growth, revenue increases, with revenue growth, expenditure can increase. These are the revised wise words of a former minister of finance.
The word from economists, captains of industry and entrepreneurs hours before South Africa’s current Minister of Finance, Pravin Gordhan, delivers South Africa’s “State of the Finances address” is loud and clear: we are looking forward to a message of hope.
Gordhan’s key performance area (or KPA) is to make sure that the government’s budget is solid, that the hard-earned taxes of people with jobs and successful companies, property owners and those privileged to travel to work by car, are wisely used to stimulate economic growth and towards the development goals of the national government.
Gordhan should be smiling all the way to the bank today! Less than 365 days ago, his KPA was challenged with an economy that was expected to grow at less than 0.5%. This year it is expected to grow by at least 1.3%. Should this be true, South Africans should not be concerned about a VAT increase at all.
A stronger economy will allow the honourable minister to increase subsidies for youth employment, public works, infrastructure programmes and student education.
The reality is that the economy is growing faster than expected, good crops are expected, no down-rating is on the horizon (good news for foreign investors) and the exchange rate is strengthening, based on an economy promising good returns for those who wish to invest in South Africa.
Leading up to today’s Budget, many concerned South Africans speculated about Gordhan’s potential “fiscal slippage” because of lower-than- expected economic growth, followed by speculations varying between a combination of direct and indirect tax increases, increases in the fuel levy, wealth taxes such as dividends tax, capital gains tax, transfer duties, above inflation sin taxes on alcohol and tobacco products, sugar tax, higher corporate income tax, and even talks of higher VAT.
According to Standard Bank economist Siphamandla Mkhwanazi, “a VAT hike means a rise in the living cost (or a decline in buying power) of consumers across the economy, but the effect is disproportionally higher for lower income households”. Household expenditure data from the BMR shows households earning below R89000 a year spend between 36% and 42% of their income on food and beverages, Mkhwanazi said.
A GDP growth rate over the next three years is expected to remain structurally low, and is unlikely to create adequate new employment to broaden the tax base; net job losses for 2017 are forecast at 108000.
Mkhwanazi points out that government, the country’s largest employer, is scaling down its wage bill, with the effect that the purchasing power of this group is at risk.
Furthermore, debt levels are higher among the middle segment than for low and affluent earners. The fact is, the middle segment comprises 32.3% of the population, and contributes 62% to total expenditure.
Some good news: the recent commodity price rally has boosted earnings of major tax contributing corporates in the mining sector, resulting in better than expected corporate tax collections in recent months.
Speculation set aside,
Gordhan will focus on delivering a State of the Finances address today honouring the goals of the National Development Plan and delivering on the hopes of the poor to truly transform the structure of the economy into a much more “inclusive
economy”.