The downgrade of South Africa’s sovereign credit rating
by global ratings agency, Standard and Poor’s, is likely to result in spending
cuts being made to South Africa’s already stressed budget.
The 2017 budget has been drawn up based on a particular
scenario. That scenario has now changed significantly after the S&P
downgrade. The proportion of the Budget devoted to debt servicing is already a
cause for concern. In order to afford the higher interest rate, based on the
presently projected income, government will simply have to borrow less.
One implication is that there will have to be cuts on the
expenditure side, which has the potential to severely impact service delivery.
The reduction in service delivery will have a detrimental impact on all
consumers, which may be exacerbated for the less affluent parts of our
community.
The proposed introduction of a National Health Insurance
system is expected to be the first to suffer setbacks. Government is also under
pressure to provide greater subsidy for tertiary education. The ability to do
so will now be severely limited unless major cuts are made to expenditure in
other areas.
Treasury will possibly attempt to increase its income by
increasing taxes further.
More taxes
The scope for increasing income taxes is extremely
limited, however. We saw limited adjustments to compensate for ‘bracket creep’
in the Budget as well as the introduction of a new 45 percent top marginal rate
for individuals. Companies are now also being taxed at the upper end of
corporate income tax rates worldwide.
An increase in the standard rate of Value-Added Tax and
removing the zero-rating of fuel would seem to be among the few remaining
options that Treasury will have to consider.
There are two ways in which removing the zero rating could
be approached.
The supply of fuel could become standard rated or it
could become an exempt supply. If fuel becomes standard rated, the direct
effect will be an immediate increase in the pump price of fuel of 14 percent.
Transport costs will rise significantly for private vehicle and public
transport users alike.
There should not be a material effect on prices of
consumer goods and services as businesses that are VAT vendors will be entitled
to claim the additional VAT paid as input tax.
The less probable scenario of making fuel an exempt
supply will result in the fuel companies not being entitled to claim input tax
relating to fuel.
This will increase their operating costs, which may be
partly compensated for by an increase in the margin for fuel retailers. This
would result in a far reduced additional tax take for government and create a
complex apportionment scenario for many businesses.
Read also: S&P first to give SA 'junk' rating
What is certain, is that the major reversal in the
exchange rate of the rand will greatly increase the prices of fuel imports. This
will hit beleaguered consumers hard. One could also see reduced corporate
profits, resulting in a reduced corporate tax take.
Of course, there may be some businesses that find a
depressed rand value to be to their advantage. Exporters whose goods are priced
in foreign currency will derive higher rand prices. They can also potentially
afford to drop their export prices to become more competitive and break into
other markets.
A further implication is that we are likely to see higher
interest rates – further placing most businesses and consumers under additional
strain. Overall the outlook is somewhat gloomy.
Major tax changes at the time of the mid-term 2017 Budget
are not probable. But we are presently in uncharted waters and we may well see
some changes coming through this year. The need for fiscal discipline has to be
balanced against the perception of panic.
If inflation does skyrocket this year, it is almost
certain that the 2018 Budget will see the removal of the zero-rating of fuel
for VAT purposes, and possibly an increase in the standard rate of VAT. Further
expenditure cuts and the fast-tracked introduction of new taxes may also become
distinct possibilities.
Read also: Rand slides on S&P credit rating cut
The road back to an investment grade rating may be long
and bumpy. Some of the key areas to shorten the ride and make it less bumpy
will include political stability and the introduction of measures to stimulate
not necessarily reflect those of Independent Media.
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