Four things to watch in the Medium-Term Budget
What economists and tax practitioners expect to see.
JOHANNESBURG – Finance minister Nhlanhla Nene (pictured) will once again be between a rock and a hard place when he presents his Medium-Term Budget Policy Statement (MTBPS) on Wednesday.
With the economy under pressure and concerns about how government will balance its books, Nene will face a tough balancing act – one rating agencies will be watching closely.
But economists and tax practitioners don’t expect the minister to drop any bombshells when he takes the podium in Parliament. The MTBPS generally provides an interim update of the country’s position and finances and may shine some light on its thinking around potential tax hikes next year, but the MTBPS is generally more a policy guideline than a rule book.
1. Economic growth will likely be revised downwards
Although National Treasury in February already anticipated fairly muted economic growth during 2015, these numbers have not materialised, says Ettiene Retief, chairperson of the National Tax Policy and Sars/National Treasury Stakeholders Committees of the South African Institute of Professional Accountants (Saipa).
Economic growth projections for 2015 will likely be revised downwards from 2% in February to somewhere around 1.5%. The latter figure is more or less in line with the World Bank, International Monetary Fund and Reserve Bank’s reviewed projections.
2. Where the budget deficit is heading
Analysts will pay close attention to government’s continued commitment to fiscal consolidation.
Dr Elna Moolman, economist at Macquarie Securities, says while the numbers are expected to be slightly worse than in February, government will likely still aim to reduce the budget deficit every year.
In February Nene expected at budget deficit of 3.9% of GDP for 2014/15 and for it to narrow to 2.5% by 2017/18.
It is also important that the debt and contingent liability threshold of roughly 60% of GDP remains under control.
Moolman says collections from personal income tax and value-added tax (VAT) should be strong enough to compensate for weaker company tax revenues, but collections will likely come under more pressure next year due to weaker economic growth and add some additional pressure to the deficit.
Christie Viljoen, senior economist at NKC African Economics, says against the background of dwindling economic growth, revenue will be under pressure, but government will likely try to stick to its budget deficit targets. This would require adjustments to spending.
Viljoen expects the minister to provide more information on how government will curb spending, as the alternative – a widening budget deficit – would not sit well with rating agencies.
3. Plans to curb spending
There appears to be consensus that Minister Nene’s greatest challenge in this economic environment is the effective utilisation of resources, says Nazrien Kader, head of tax at Deloitte Africa.
“Citizens will be watching for a continued focus on cost reduction and the curbing of wasteful expenditure. With a rising tax to GDP ratio (hovering around 26.1%, which is up from 25.3% in the previous year), the profile of tax collections is expected to mirror that of previous years with individuals likely to retain the highest level of contribution, VAT a close second and company taxes, third in line,” she says.
Kader expects that the focus will continue to be tax-anti avoidance in the form of measures to counteract tax-base erosion and profit-shifting for companies and wealthy individuals (including the expat community), tax base broadening measures such as limitations on tax incentives and allowances as well as stronger enforcement and policing of existing laws.
Moolman says a big concern in the medium to longer term is to what extent state-owned enterprises like Eskom and the South African Airways would need additional support. This could put debt levels and the accompanying interest bill under even more pressure.
4. How government plans to incorporate recommendations by the Davis Tax Committee in its plans
Zweli Mabhoza, founder of Priority Tax Solutions, says the minister may also provide more information about the recommendations of the Davis Tax Committee around tax policy changes.
The Davis Tax Committee has released several reports with recommendations, but consultation in this regard is ongoing.
“They may clarify exactly how trusts are going to be taxed going forward,” Mabhoza says.
In its MTBPS in 2014, National Treasury signaled its intention to hike personal income tax rates for wealthy individuals in 2015.
Retief expects tax hikes to be on the cards once again in February next year and the MTBPS on Wednesday could provide some insight into government’s plans in this regard.
While there have been lots of speculation about a potential increase in the VAT rate (particularly to fund large new projects such as a National Health Insurance), Gerhard Badenhorst, tax executive at ENSAfrica, says it is unlikely that the MTBPS would allude to any drastic changes in this regard as the recommendations of the Davis Tax Committee is still under consideration.
