Head of Tax and Asia Practice
Budget: 2015 to be a watershed fiscal year
24 February 2015
The 2014/15 national budget speech will be presented in an environment without precedent in our country's history for a variety of reasons that we are all painfully aware. Our country's image has not been enhanced nor has business confidence been improved.
The themes of past budget speech, since 2010 have been:
- 2010 - "forge a new growth path"
- 2011 - "freedom from poverty"
- 2012 - "write a new story about South Africa"
- 2013 - "setting 5 priorities namely education, health, crime, creating work, rural development"
- 2014 - "move forward towards a better life for all. It is time for action and implementation"
The 2015/16 budget will pursue the same elusive goals of economic stimulation and job creation. Finance minister Nhlanhla Nene in his medium term budget speech candidly admitted that South Africa was making insufficient progress in raising incomes and reducing poverty. He noted four obstacles that must be addressed, being energy constraints, labour market disruptions, skill shortages, administrative shortcomings and difficulties in industrial transformation.
In addition, tax revenue was below budget, government's debt continued to rise as a percentage of GDP, fixed capital investment was insufficient and expenditure on public services achieved less than it should. He called for balance to be restored in the nation's finances, the bolstering of investment and better value for money in public expenditure.
The economy was budgeted to grow by 2.7% but the revised estimate is a paltry 1.4%. Nene expected the consolidated budget deficit to be ZAR153 billion or approximately 4.1% of GDP and he aimed to reduce the deficit to 2.5% over the next three years. Additional revenue of ZAR15 billion was required and we will hear how he intends to raise it in his budget speech while achieving his stated goals.
Implications of SONA
President Jacob Zuma in his SONA warned that the growth target of 5% by 2019 was at risk. He was confident that relative stability and optimism in the mining sector had been restored. The truth of the matter is that the mining sector is a shadow of its former self and a fraction of what it could be.
Despite Zuma's optimism, four days later, Business Day recorded Anglo American's serious concerns regarding the pricing of mineral sales, the review of the mining charter, declining commodity prices and on-going labour issues. The mood at the 2015 Mining Indaba was very subdued.
Less than 50% of my foreign clients attended. There is an apparent sentiment in some government circles that the world needs us more than we need it and investors will always return notwithstanding what policies are set or what imprudent public statements are made because we have the minerals in the ground. That may or may not be true but do we wish to engage the world from a position of strength – with a successful and prosperous mining sector or with a declining and weak one.
Zuma's brief reference in his speech that foreign nationals will not be allowed to own land in South Africa and the scrapping of the willing buyer or willing seller principle in land acquisition by the state, was followed by much needed explanation of what is intended. It would have been preferable had the subsequent assurances to foreign investors been given during the speech.
The backdrop to the budget is a global economy struggling to revive itself, a declining South African economy, dropping revenue collections, rising government debt, wasteful and inefficient state spending, as regularly reported by the auditor-general's reports, a very thin tax base where a small percentage of the population pay the majority of the tax and an apparent lack of co-ordination in economic policy between the tripartite alliance.
Who is holding the reins in driving our economic strategy? There is a manifest lack of leadership culminating in a confused economic direction guided mainly by ideology and emotion and less so by a hard understanding of global economic realities? The 2015/2016 fiscal year will be a watershed for us.
Obviously the slowing global economy has affected our economic growth but we must admit our own goals in the form of energy problems, labour market disruptions, skill shortages and administrative shortcomings, where incompetence is accepted and lack of accountability is the norm.
We must ask "what do we get in return for our tax rand?" Do we enjoy good public security, good public healthcare, good state funded retirement benefits, good public education? Do we receive uninterrupted electricity and good competent service when dealing with government departments?
The regular and nationwide delivery protests provide us the answers. The National Development Plan intends to develop a contract between a capable development state, a thriving business sector and a strong civil society. We have much to do. The state has lots of plans but an inability to implement.
Growing the economy
Raising taxes in a shrinking economy is counter-productive. Increasing corporate taxes is a backward step and contradicts the message that South Africa is open for business. Growth and investment is insufficient to create new jobs and job creation is a primary focus. The path to stimulate small and medium enterprises must be followed.
Where are our entrepreneurs and what is been done to encourage them? Elon Musk and Patrick Soon-Shiong are two primary examples of South Africans who left the country and have enjoyed enormous success overseas. We need them here.
My expectations of the budget are an emphasis once again on tax compliance and anti-avoidance. The new battle ground will be transfer pricing and base erosion profit shifting. We can expect a further exhortation of taxpayers to do the right thing but unfortunately, the Fisc has lost the moral high ground. We will see an attempt to provide relief for the lower end of the pay scale but not as much as we have seen in the past.
An increase in the personal maximum marginal tax rates from 40% to 42% and an increase in the rate of dividend tax is on the cards. An increase in the capital gains tax effective rate would be politically attractive. An increase in the VAT rate is been touted but would prove that we have touched the bottom of the barrel.
An increase in the usual sin taxes is a given and there will be announcements on plans to control and even decrease government expenditure but the measures will probably be more symbolic than actual. An announcement of when the tax incentives will take effect in the special economic zones is eagerly awaited. Announcements on changes to our exchange control policy are not expected. The fuel levy will increase.
What is needed is less tinkering and more medium to long time planning and it would be welcomed if a working and monitoring group, involving the private sector, were to be convened to identify the blockages in our economy. We require an honest evaluation of where we are without finger pointing and playing the blame game and concentrate on no more than three key areas to improve and stimulate the economy rather than an unfocussed high level broad-based plan. Progress needs to be monitored on a regular basis and there must be a concerted effort to attract foreign direct investment.
If needs be, specific tax incentives should be given in particular sectors. The specific tax incentives must be carefully monitored by well-trained tax assessors to ensure that they are not abused. We have an attractive workable regional headquarter company regime, which needs a little adjusting and assurances to foreign investors that it is stable and will not be withdrawn at a whim. Africa is the target and South Africa is the preferred base.
As ex-finance minister Pravin Gordhan said in last year's budget speech, lessons have to be learned, mistakes must be acknowledged, corrective steps must be taken and it is time for action. We face enormous challenges but I am firmly convinced that our economic position can be turned around in a relatively short space of time with the correct action.
I have foreign clients waiting to invest and provide funding and skills in the energy and infrastructure space. These investors are prepared to commit to job creation and will look for joint ventures with willing South African partners but the lack of focus, lack of co-ordination, lack of skills and an inability to implement plans into action by the public sector are obstacles that must be addressed.
The country finds itself in a very difficult space but South Africans are an extremely resilient bunch and despite us lurching from one crisis to the next, we have always managed to eventually come out on the right side. We need that resilience now more than ever. The private sector will have to step up. The 2015/16 fiscal year will be a watershed year.
Head of Tax and Asia Practice