Back to reality! In his October Medium Term Budget Statement, Finance Minister Malusi Gigaba, painted a stark picture of South Africa’s current economic position. The growth estimate for this year is 0.60% and for 2018 a very languid 1.1%.
This contrasts with the outlook for global growth which the IMF estimates will be 3.5% for this year rising to 3.7% for next. Consequently there is a strong economic pulse globally and increased confidence as a result.
The highlight, or more accurately the lowlight, of Gigaba’s statement, was the projected shortfall in revenue to the fiscus of some R50bn for 2017/18. Sadly the minister was unable to offer much by way of solutions bearing in mind the continuing anaemic growth outlook.
So where is the money to be found and what effect will a possible downgrade to full junk status have on the situation? The latter will of course increase the cost of borrowing as recent bond sales have shown with interest rates on new SA bond issues higher by between 45 and 75 basis points.
If one also considers the costs of the scrapping or subsidisation of higher education fees (anything between R17bn and R40bn depending on which option is taken) together with the increased cost of borrowing, then the revenue shortfall could easily exceed R100bn and counting. This is to say nothing about the possible implementation of a nuclear programme or indeed another possible unaffordable – NHI.
With concerns about tax compliance already very much to the fore, together with the slow growth projections, the idea of raising income tax, both personal and corporate, should really be a non-starter. The most obvious source of additional revenue would be raising the VAT rate. At 14%, SA ‘s is lower than the 16% for Africa and Europe’s 20%. A 1% increase would bring in an additional R20bn per annum. However, Cosatu and others are vehemently against a blanket increase. They might countenance a modest increase if up to 20 further items, deemed as necessities, be zero rated. This would cost an estimated R4bn but would be offset if VAT on luxuries was to be increased to 20%.
Because of its relative simplicity, our current VAT system is one of the most efficient and successful globally. Consequently, the Davis Tax Committee, which is looking into the country’s tax structure, is against a cumbersome multi-tiered system. Nevertheless, an increase of some sort, however structured, is highly likely.
The Davis Committee has also been looking at a possible wealth tax which might bring in another R6bn a year. It is also suggesting a review of Estate Duty which could yield a further R1bn to R5bn. We are not sure how these estimates have been arrived at but no doubt all will be revealed in due course!
Then the recent “Paradise Papers” expose could lead to further revenue income if the parties involved were to be investigated together with the possible re-launch of the Voluntary Disclosure Programme for tax payers to come clean on hidden assets. It is estimated that this might yield anything up to R10bn.
So, all in all, another R40bn or thereabouts could be raised through these sources. Even so this would not cover the total projected shortfall which in itself, as we have noted, could easily be exacerbated by higher borrowing costs due to junk, funding of student fees, NHI and the nuclear idea which may or may not become a reality.
As has been said so many times, the best way out of this is through substantial increased economic growth and the cutting out of wasteful expenditure in the public sector – to say nothing of the latter’s unaccounted-for expenditure!
Whatever awaits us as individuals, it is so important to take advantage of and to maximise all the legitimate tax saving measures available. As always, we at Maximus are ready and able to assist our clients in achieving this.