Predictions - National Budget 2012 - updated after the State of the Nation address by the President in February

Posted on: 22 February 2012

The following statement is a pre-budget prediction in anticipation of next week’s Budget Day, as prepared by Ernie Lai King, tax Executive at Edward Nathan Sonnenbergs.

 

As with the immediate past two National Budgets - job creation and the nurturing of the economy will continue to be the priorities in the 2012 Budget. The priorities were re-emphasised in both the Finance Minister's medium-term budget speech in October 2011 and the President’s State of the Nation speech, on 10 February 2012.

 

Economic growth and job creation will again be the watch words. This together with improved service delivery is an imperative in the interests of social stability.

 

The President was pleased that the job creation had been maintained in every Government entity, including State owned enterprises. A massive infrastructure development drive was announced for 2012 and beyond, focused primarily in rail, road and water infrastructure to unlock the enormous mining sector potential in coal, chrome, palladium, platinum and other minerals. R300 billion will be spent by Transnet over the next seven years, approximately R43 billion per annum. The mining sector has obviously been identified as a growth area. I will return to this issue in a moment. No detail was given as to how this expenditure will be funded

 

Ongoing press reports of maladministration, extravagant spending by various State entities with little signs of improvement is of obvious concern and the President announced that plans are in motion to improve governance, systems and administration. Such announcements have been made in the past State of the Nation and National Budget speeches but unfortunately little progress appears to have been made with only a few Ministers and State employees been held accountable for their incompetence.

 

Job creation and the stimulation of economic growth will be the foundation stones of the Budget speech. The sluggishness of the economy, affected by the overall global slowdown appears to have prompted Government to turn to its own efforts in order to create jobs i.e. the infrastructure development plans. Caution however should be exercised not to create a bloated Public Service as once created, it will be very difficult to shrink and we only have to look at the rising percentage of state spending on public sector salaries and wages. A sector which has not covered itself in glory in terms of efficiency and service delivery. It should not become a safe haven for the ill trained and unemployable.

 

We look forward to an update from the Minister on the success achieved to date by the Job Creation Fund implemented last year.

 

Arising from the decline in economic performance, tax collections are expected to fall below what was budgeted. The only question is by how much. On the assumption that tax collections will be below budget, Government will have to again rely on increased borrowings to fund State expenditure needs, including the announced mega infrastructure development plans. Government borrowings have increased steadily over the past several budgets and the higher borrowings will have to be very carefully managed. Debt service costs are already the fastest growing category of State expenditure. Care must be taken that borrowings do not reach such a level that we mortgage our future tax revenues.

 

No significant tax amendments are expected, as the 2011 tax amendments were extensive and very complex, in fact to the extent that there are rising fears that the complexity in the tax system is outstripping the ability of SARS to implement the latest laws.

 

There may be a controversial announcement that a special task force will be established to investigate the implementation of a new mining tax system similar to the Australian Mineral Resource Rent Tax, which taxes mining companies on super profits, in order to fund the development of small businesses, infrastructure development and pensions.

 

We expect some discussion on the establishment of economic development zones.

 

No change in the corporate standard rate of taxation is expected and with the introduction of the new dividend tax on 1 April 2012, the effective corporate rate will dropfrom 34.5% to 28%.

 

No change in the maximum marginal rate of tax for individuals is expected, with moderate relief for fiscal drag and any relief will be restricted to the lower earnings levels. Fewer than 6 million taxpayers pay 95% of income tax and we expect an emphasis on the auditing of “high wealth” individuals.

 

An increase in the VAT rate is not expected.

 

More warnings against tax avoidance and non--compliance are expected.

 

We hope for a progress report on the renegotiation of double tax treaties, in anticipation of introducing a withholding tax on interest next year is expected. There may be an announcement that the introduction of the withholding tax on interest will be postponed until 2014.

 

We expect a a progress report on the latest thinking on how to fund the National Health and Insurance scheme is expected. It was proposed in the last budget that proposals to fund the scheme, through increased PAYE and VAT, would be considered.

 

Some years ago a centralised State super provident fund was proposed. Perhaps the Minister will make some mention of progress in implementing such a fund.

 

Announcements on the implementation of new Green taxes  e.g. A tyre tax.

 

Wishes

 

It is hoped that the Minister of Finance will send a very strong message that the State Departments and employees who do not provide a competent service will be held accountable and strong action will be taken to rectify the shortcomings. This is very important as the Minister of Finance will erode his moral high ground when exhorting taxpayers to rightfully pay what is legally due to the State, if reports of corruption etc continue. The overall poor delivery by the various State departments and the lack of accountability is causing a rising dissatisfaction amongst taxpayers, which could undo the good work that has been achieved to improve tax morality.

 

Every effort should be made to broaden the tax base by stimulating the private sector economy. Unfortunately we have, generally speaking a First World private sector, where financial services for example and many other business sectors are recognised as internationally competitive but they are hindered by a Third World public sector. If sustainable job creation efforts are to succeed, a more friendly business environment is required.

 

Foreign investors are losing patience with the inordinate delays in trying to do business.It has been my recent experience that foreign investors are beginning to look more seriously at the rest of Africa, in preference to South Africa for varying reasons, including-

21.1.       inefficient and badly trained civil servants hold up applications for mining licences, work permits, establishment of companies,

21.2.       various investor unfriendly regulations,

21.3.       crime.

 

There is obviously an appreciation by government for the need to stimulate the economy but unfortunately they appears to be a lack of coordination in the strategic direction and we only have to turn to the recent Cape Town Mining Indaba. Ministers Manuel and Shabangu were at pains to reassure the numerous foreign investors attending the Indaba and to provide certainty that the nationalisation of mines was no longer a feasible option. A day later Mr Gwede Mantashe undid all their efforts by not only publicly contradicting them but wagging his finger at the foreign investor community a la PW Botha that South Africa would not be blackmailed by threats that investment would be diverted to our neighbouring countries. South Africa needs to talk to the investor world with a common voice in order to imbue confidence.

 

The lack of coordination extends also to tax policy in the stimulation of the economy. What is our tax policy direction? Is the end objective to reduce tax rates across the board or to provide specific tax incentives, tax holidays, economic development zones? In order to provide effective tax incentives the State must have sufficient and well trained tax assessors to ensure that the incentives are not abused. Although the South African Revenue Service is held up as an example of a well-run Government situation it suffers like all other State departments from a lack of skills, especially in the light of the ever increasing complexity of our tax system. Over the past several years there has been a palpable decrease in service from SARS in the handling and responding to tax disputes. This may be attributed to the aforementioned lack of skills.

 

In the result, any tax incentives introduced to stimulate the economy is overly complex with anti-avoidance provisions, which virtually kill the attractiveness of the incentive. Steps must be taken urgently to increase the skills base of SARS personnel by improved and sustainable training.

 

Faced with the reality of reducing tax revenues, primarily arising from a weak economy, it is incumbent upon the State to address inefficiency, extravagance and wasteful public administration.

 

The idea of a new Business Tax, similar to the abolished Regional Services levies, touted by five Metros to raise municipality finance, must be resisted at all costs in the light of existing inefficiency and wasteful spending.

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