SLUGGISH economic growth and a whopping R16.3bn shortfall in tax revenue this year has resulted in a higher-than-forecast budget deficit and spending cuts over the next three years.
Higher taxes and the possible sale of state-owned assets are on the cards in future if disappointing growth and sliding revenue collection continued, Finance Minister Pravin Gordhan warned at a media briefing on Wednesday ahead of the delivery of his budget speech in the National Assembly.
A total of R10.4bn has been sliced off the government’s spending plans over the next three years in view of “tight fiscal conditions”, and the contingency reserve has been reduced by R23.5bn.
The budget deficit for 2012-13 is estimated at 5.2% (R185bn) instead of the 4.8% projected in the medium-term budget policy statement in October. This is after taking into account the underspending of R4bn by national departments this year.
The deficit is expected to fall to 4.6% in 2013-14, to 3.9% in 2014-15 and to 3.1% in 2015-16.
Economic growth forecasts have been lowered to 2.7% for 2013, 3.5% for 2014 and 3.8% for 2015, following growth of 2.5% in 2012, while inflation is expected to rise an average of 5.5% a year over the next three years.
Adjustments to fiscal plans
Mr Gordhan stressed that despite “necessary adjustments” to the fiscal framework in the face of “heavy winds”, South Africa had stable growth and a stable fiscal situation.
He insisted that the government was determined to remain within its spending envelope set out in the budget.
“New policy initiatives over the next three years will be financed from savings, efficiency gains and reprioritisations,” the minister said in his speech. “Money has been taken away from programmes that are not performing or are not aligned to the government’s core priorities and given to programmes that are delivering as planned.”
Already, R52bn has been shifted to key priorities.
The minister said the government would continue its drive to achieve savings, eliminate wasteful expenditure, enforce stricter tax compliance and fight corruption. Control over procurement will be tightened to ensure the government gets better value for less money.
The R1.06-trillion budget tabled in Parliament on Wednesday provides little fiscal room to fund new initiatives, with the only major new spending item a R7.9bn recapitalisation of the Development Bank of Southern Africa (DBSA) to enable it to expand its lending activities.
Individual taxpayers will be compensated for the affect of inflation on tax brackets with R7.4bn in personal tax relief.
Only R2.3bn is added to non-interest expenditure over the 2012 budget, while the net effect of the tax proposals is to reduce total estimated tax revenue by R2.4bn.
Despite strong opposition from trade unions, the Treasury has gone ahead with plans for a youth wage employment incentive, which will function as a credit on payroll taxes. Legislation will be tabled in Parliament in the next few months.
The Treasury is expecting the first year of the programme to present a revenue loss of about R500m. The incentive will apply to workers of all ages in special economic zones.
Rising debt service costs
Debt service costs (R100bn in 2013-14) emerged as the fastest-growing item in the budget, rising by a real average rate of 4.5% over the next three years to reach R118bn in 2015-16, forcing cutbacks in government spending. Over the next three years, the government needs to borrow an additional R497bn, increasing debt to R1.7-trillion — or 40.3% of gross domestic product.
Despite the constraints, the budget does provide for continued, albeit lower, real growth in spending of an average 2.3% over the three-year period compared with the 2.9% signalled in the medium-term budget policy statement. Real growth in capital expenditure is expected to average 3.4% over the period.
Much reliance has been placed on massive infrastructure investments to drive growth. The government and state-owned enterprises will spend R827bn on infrastructure over the next three years, while public sector infrastructure investment as a whole is estimated at R3.6-trillion.
Gross tax revenue target for 2013-14 has been lowered from the R913.6bn estimate in 2012 to R898bn.
A total of R951bn — after the R100bn allocated to debt service costs — will be allocated in 2013-14 to national departments (47.6%), R415bn to provinces (43.5%) and R85bn to local government (8.9%). Education and related functions will get R232.5bn, of which basic education will take R164bn; social protection will get R135bn; health has been allocated R133.6bn; housing and community amenities R132bn; police services R73.4bn; defence R44.8bn; and transport R74.6bn.
A new local government equitable share formula is proposed, providing a subsidy for free basic services. The new formula will provide a subsidy of R275 for every household with a monthly income of less than R2,300 — about 59% of all households.
Spending on social assistance will rise to R120bn in 2013-14. Mr Gordhan said the means test for the old-age grant would be phased out by 2016, accompanied by offsetting revisions to the secondary and tertiary rebates. This means all citizens over a designated age will be eligible for the grant. The rationale, he said, was to simplify administration and remove the disincentive to save arising from the means test.
The budget provides for increases in social grants of about 5%.
The government’s gross borrowing requirement of R215.5bn in 2013-14 will be financed mainly with domestic bonds.
Selling off state assets
As the government digs around for extra funds in a fiscally constrained environment, it will be looking at the sale of some its stakes in state-owned enterprises — a political holy cow that is likely to be fiercely contested by the labour movement.
“The government is reviewing its substantial investments in state-owned companies,” the budget review said. “Some of these companies hold cash, excess financial reserves or assets that are not associated with public service delivery.
“Where such resources can be more productively applied to support policy priorities, the sale of such assets — or the return of surplus funds to the fiscus — will be considered.”
The review said it would be necessary to forge strategic partnerships with private companies “to co-invest and bring technical expertise to large public infrastructure projects”.
However, when asked whether privatisation was planned, Mr Gordhan replied with an emphatic “no”.
Tax revenue and corporate tax
The lower tax revenue collected compared with 2012 budget forecasts was due to “weak economic growth, mining sector disruptions and lower commodity prices”, Mr Gordhan said.
Corporate and personal income tax fell short of budget projections, with corporate income tax yielding R156.4bn instead of the budget estimate of R167.4bn and personal income tax yielding R274bn instead of the projected R286bn.
Mr Gordhan also said that a R2.9bn tax incentive for special economic zones would be introduced. Businesses in these zones will pay 15% corporate income tax and enjoy an employment incentive allowing for a tax deduction for employment of workers earning less than R60,000 per year. They will also benefit from an accelerated depreciation allowance to encourage developers to invest more in industrial premises.
Further tax relief is given for small businesses, including an increase in the monetary tax thresholds. The rate of tax for small businesses with taxable income of between R67,112 and R365,000 will be 7%, those between R365,001 to R550,000 will pay 21% and those above R550,001 will be taxed 28%.
The application of the same rate structure to the trading activities of public benefit organisations will be explored.
Personal income tax brackets are shifted to take account of fiscal drag, at a cost to the fiscus of R7.4bn. The primary rebate is increased from R11,440 to R12,080 and the secondary rebate from R6,390 to R6,750.
The tax threshold for those below 65 years rises from R63,556 to R67,111, for those 65 years and older from R99,056 to R104,611, and for those 75 years and over from R110,889 to R117,111.
A raft of measures to reform retirement tax — as announced previously — are in the pipeline. Mr Gordhan said legislation would be introduced later this year and said that tax preferred savings and investment accounts would be introduced in 2015. He also said the tax treatment of pension, provident and retirement annuity funds would be simplified.
The tax treatment of trusts will be reformed to curtail tax avoidance.
Carbon tax and biofuel production incentive
Mr Gordhan announced the introduction of a carbon tax to mitigate the effects of climate change. It will be introduced at the rate of R120 per ton of carbon-dioxide equivalent effective from January 1 2015. The rate will increase at 10% per year during the first phase of implementation between 2015 and 2020.
“To soften the impact, a tax-free exemption threshold of 60% will be set with additional allowances for emissions-intensive and trade-exposed industries,” the budget review said.
The tax-free threshold will apply during the first phase as well as offset percentages of 5%-10% “to allow emission-intensive and trade-exposed industries to invest in projects to help reduce their carbon-tax liabilities”, the review said.
An updated carbon-tax policy paper will be published by the end of March.
An additional R300m has been allocated to the Green Fund, previously given R800m, which is used to encourage companies to develop creative low-carbon projects.
An incentive has been proposed to help establish of the eight biofuel manufacturing plants envisaged by the government’s biofuel strategy. It will be based on benchmark costs of hypothetical world-scale plants in South Africa and compensate for monthly movements in benchmark feedstock and output prices.
It will be phased out over an assumed 20-year lifetime of a benchmark plant. The initial cost of the incentive will be 3.5c/l to 4c/l of petrol or diesel, recovered through a levy included in the monthly price determination.
VAT registration of foreign businesses and offshore expansion
To overcome the non-payment of value-added tax (VAT) by local consumers who buy imported digital goods and services, the Treasury has proposed — in line with international trends — that all foreign businesses supplying e-books, music and other digital goods and services in South Africa be required to register as VAT vendors.
Mr Gordhan also said simpler rules would be introduced for companies expanding their operations into Africa to reduce the time and cost of doing business on the continent. Measures to relax cross-border financial regulations and corporate tax requirements will also make it easier for banks and other financial institutions to invest and operate in other countries. Similar measures will apply to foreign companies wanting to invest in African countries using South Africa as their regional headquarters.
The outward investment reforms associated with the “Gateway to Africa” endeavour will also apply to companies wanting to invest in countries outside Africa, including Brazil, Russia, India and China — the so-called Bric countries.
Sin taxes and fuel levy
Excise duties on alcohol and tobacco products rise between 5.7% and 10%.
Malt beer increases 7.5c to R1.08 per 340ml can; unfortified wine goes up 15c per 750ml bottle; ciders and alcoholic fruit beverages by 7.3c per 330ml bottle; spirits by R3.60 to R39.60 per 750ml bottle; and cigarettes by 60c to R10.92 for a packet of 20.
The fuel levies will increase by 23c/l in April, including an 8c/l increase in the Road Accident Fund Levy.