Slim choice for Nene

21 October 2014 - 02:01 By TJ Strydom
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Nhlanhla Nene. File photo
Nhlanhla Nene. File photo
Image: Gallo Images / Foto24 / Mary-Ann Palmer

The Treasury's belt-tightening could mean that consumers start paying tax on brown bread and vegetables, or that the middle class pays more income tax soon.

This is the view of analysts ahead of Finance Minister Nhlanhla Nene's tabling his first medium-term budget tomorrow.

Nene is expected to outline how he plans to keep spending in line while trying to shore up revenue.

The government has been collecting less revenue this year than forecast and spending it quicker than planned.

On top of that, public-sector workers are demanding wage increases of 15% - double the inflation rate. Nene has said the government cannot afford more than one percentage point increase above inflation.

When Nene's predecessor, Pravin Gordhan, tabled his budget speech in February, tax revenue was expected to increase by 8.6% compared with the previous year, says Izak Odendaal, Investment Analyst at Old Mutual Wealth.

"But five months into the current fiscal year tax revenue is growing by only 6.9% compared with the same period last year.

"Tax-revenue projections for the following two fiscal years (9.9% and 10.3% respectively) now seem very ambitious," says Odendaal.

Economists Peter Worthington and Miyelani Maluleke, from Barclays Capital, echo this, saying the economy has grown much more slowly this year than expected.

After initially expecting growth of 2.7% in January, Nene is expected to slash the Treasury's forecast tomorrow, even to as low as the International Monetary Fund's latest figure of 1.4%.

Momentum Asset Management economist Sanisha Packirisamy thinks it unlikely that Nene will raise VAT, though it would help narrow the deficit a bit.

"Likely options that could be hinted at include raising the marginal tax rate for upper-income households, or hiking dividend taxes or estate duties, in addition to the usual fuel levies and sin taxes," Packirisamy said.

Odendaal says Nene has three options:

  • Eliminate VAT exemptions;
  • Increase marginal tax rates for high-income earners; or
  • Close tax loopholes.

If Nene is to continue Gordhan's plans, he needs to rein in the budget deficit to 3% in the next three years. Nedbank economists expect him to rather widen it to 4.4% in tomorrow's speech.

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