Budget2020: Load shedding, downgrades and tax hikes
DURBAN - On 26 February, Finance Minister Tito Mboweni will deliver what may be one of the most important South African budget speeches of the past 20 years.
As he has indicated in public remarks over the past few weeks, he is keenly aware that government is rapidly running out of time and space to revive economic growth and put public finances on a sounder footing.
With the sword of a potential (some might say likely) downgrade of South Africa’s sovereign credit rating hanging over his head, near-record levels of unemployment, and limited fiscal room, Minister Mboweni is under pressure to deliver bold reforms. And to restore investor and business confidence he may need to take some steps that will be unpopular with taxpayers and constituencies like the trade unions.
Here a few points I am keen for the Minister to address in the Budget Speech:
1. Inequality and the national minimum wage
A national minimum wage came into effect in South Africa on 1 January 2019 after several years of political debate. Despite concerns from unions that it is not a genuine living wage, and from businesses about affordability, a minimum wage that sets a baseline for industries that did not previously have a regulating measure was a step in the right direction.
I’d be interested in seeing the statistics on employer compliance. Trade unions are pushing government to hike the minimum wage by 12.5 percent this year – will government concede when unemployment is so high and growth so low?
With the recent changes in employment equity reporting requirements, government will have more accurate data about wage disparities between the highest and lowest paid employees in local companies. Given better information about wage gaps into different industries, government may be better placed to set benchmarks for different sectors.
2. Tax increases
According to the Minister’s medium-term budget policy statement in October 2019, government debt will most likely exceed 70 percent of GDP by 2022/23 without any policy adjustments. National debt is expected to balloon from R3,2 trillion to R4.5 trillion in the next three years. Government needs an additional R150 billion in the same timeframe to meet its fiscal targets.
Between state owned enterprises burdened with debt, new spending priorities like National Health Insurance (NHI), and the ongoing need to invest in infrastructure and services, government has to raise more taxes and cut back on spending. Higher sin taxes and fuel levies are a given, but it also seems possible that we will see further personal income tax increases or a VAT increase or possibly both.
Room for manoeuvre is severely limited. According to SARS, only about 3 million taxpayers paid 97 percent of income tax last year and taking more money out their pockets could dampen economic growth and in turn reduce tax receipts in future years. And severe cutbacks on government spending would not only be politically unpopular, but also harm economic growth -- Minster Mboweni has a delicate balancing act to pull off.
3. Youth unemployment
With unemployment at around 29 percent and youth unemployment of over 50 percent, joblessness is a major source of suffering and a threat to social stability in South Africa. The outlook is grim, with companies in sectors as diverse as financial services, retail, telecoms and technology announcing plans to retrench thousands of employees over the past few months.
I am hoping to hear that government is taking drastic steps to address this crisis. A good place to start would be to streamline the administration of the Employment Tax Incentive. While well-intentioned, many small businesses find it so burdensome to administer this incentive that they prefer not to claim.
There are other schemes that should also be better explained and marketed – for example, the Youth Employment Service programme (YES), which is a partnership between business, government and labour. YES aims to create one million jobs for youth. In this process, firms can gain one or two levels on their B-BBEE scorecard.
4. Annuitisation of provident funds
To recap, National Treasury several years ago harmonised how all types of retirement funds (pension, provident and retirement annuity) are treated under South African tax law.
An employer's contribution towards any pension, provident or retirement annuity fund are now all treated as a taxable fringe benefit for the employee. Plus, a tax deduction is allowed for both the employee contribution and the fringe benefit of these funds, subject to certain limits whereas no deduction was allowed in the past for provident fund contributions.
National Treasury also proposed that the treatment of pay-outs should be aligned. In the same way as members of other retirement funds, provident fund members would only be permitted to take one third as a lump sum on retirement and obliged to annuitise two thirds. Implementation of this annuitisation requirement was postponed several times, most recently to March 2021.
I’m curious to see if government will finally bite the bullet on this issue, despite trade union opposition. Ultimately, if the pay-outs for all classes of retirement fund cannot be standardised, the reforms may need to be rolled back and contributions may need to be treated in the same way as they were in the past.
Yolandi Esterhuizen is a registered tax practitioner and Compliance Manager for Sage Africa and Middle East
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