South Africans are not in for good news when Finance Minister Pravin Gordhan presents his Budget speech on Wednesday with a lowered expectation of growth, most likely some new taxes – particularly for the wealthy – and a commitment to extract more tax from the mining industry.
André Roux, the co-head of fixed income and currency, Investec Asset Management, noted that as the country waited “with bated breath” to hear what tricks the Treasury might have up its proverbial sleeve. “This is one year where we don’t envy the minister of finance as this is going to be a Budget without any good news,” Roux said.
Noting that Gordhan had projected a growth rate of 3.2 percent in the October medium-term budget policy statement (MTBPS), it was likely that this growth protection would be something like 2.5 percent.
Investec chief economist Annabel Bishop noted that President Jacob Zuma in his State of the Nation speech said the country needed “suitable tax policies” to generate sufficient revenue to pay for services provided.
While this might mean that Gordhan would hold back at this stage on new “resource rent” taxes for the mining industry – as supported at the ANC’s Mangaung conference, Bishop noted that he would be commissioning a study of current tax policies “to make sure that we have an appropriate revenue base to support public spending”.
She suggested that the emphasis should fall on indirect taxation, like VAT and regionally differentiated fuel levies to allow for road projects in particular provinces.
Raising corporate and individual taxes would undermine growth prospects, she said.
Bishop said she believed that the president’s stance “implies higher future taxes for higher income earners”. This was likely to be from 2014 “in line with government redistributive income policy for South Africa”.
She warned that as the government absorbed more of the country’s output via higher taxation, economic growth would not rise if the government proved not to be as productive as the private sector. “Economic growth would then likely slow instead,” she said.
Roux noted that in the October MTBPS, Gordhan had signalled that he would aim for a deficit to gross domestic product of 4.5 percent with expenditure and revenue growth targets of 9 percent and 10.5 percent respectively. “We expect the latter to present him with a significant challenge for the new fiscal year.”
The recent loss in momentum of personal and company tax “may well roll over into the new year”, he said. “While Minister Gordhan may this time round have been saved by very strong VAT growth – which we are benefiting from at the moment – one must doubt whether a similar performance is achievable next year, given the recent softness in retail activity.”
Roux said “unfortunately for taxpayers”, the minister might have to “tweak tax rates” a little and he might also have to be “a tad cautious” in terms of the usual compensation for inflation that he makes to income tax brackets. There was a small possibility he might increase marginal tax rates – raising the top marginal rate from 40 percent to 42 percent.
He might also increase the rate of capital gains tax “as was the case in last year’s Budget”, Roux said.
Hlumelo Biko, the executive chairman of a venture capital firm Spinnaker Growth, warned against the government imposing more tax extractive policies.
“So far policymakers in the Zuma administration are proposing that the state should identify market failures such as the land redistribution process and the failure of transformation in the mining industry and increasing the costs to the holders of these assets through taxation,” he said.
The economic theory behind this was that the government could target taxes to reduce “rent seeking behaviour” by these owners of assets and that the government would use the tax receipts to finance programmes that would work towards poverty alleviation.
“To date, a land tax has been mooted to try and tax those land owners who are in possession of agricultural land that is not being used productively,” he added. “Similarly, in the mining industry a tax on superprofits is being advocated by some policymakers.”
The danger with this approach, Biko said, was the risk of policy failure through inappropriate or outright adverse incentives “is high”. This could lead to reduced private sector investment in this industry, as well as increased tax avoidance.
Biko, who at the weekend launched his book, The Great African Society: A Plan for a Nation Gone Astray, said the government should craft an intervention to take the country back on the high road. This would involve a massive redistribution programme managed by the private sector. These would include far-reaching policy changes in schooling, housing and health.
On Friday Rural Development and Land Reform Minister Gugile Nkwinti was tackled on his comments that foreign land ownership in South Africa should in future be stopped. Pressed on whether this was a contradiction of Gordhan’s friendly approach to foreign direct investment, Nkwinti did not see it that way. Nkwinti said emphatically: “No.”
He said the government had a responsibility to transform agricultural land. Thus land reform efforts were focusing on not allowing foreign nationals to own farm land.
Pressed on whether this included urban land owned by foreigners, he said ownership of land by foreigners “in other spaces” of the country would be considered later.
It could not just be considered from the angle that “there are people from outside who are investors here and we must be friendly to them… no”.