High-income earners in for a tax shock

23 October 2014 - 02:29 By TJ Strydom
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Finance Minister Nhlanhla Nene. File photo.
Finance Minister Nhlanhla Nene. File photo.
Image: Gallo Images / Nardus Engelbrecht

Tax increases are to be implemented to help plug the gaping hole in the state's finances.

Over the next two years, the national Treasury wants to rake in an additional R27-billion in taxes and another R17-billion in the third year.

"We all have to take the pain," Finance Minister Nhlanhla Nene said yesterday before tabling his first medium-term budget.

Though Nene said he would only announce details in February, it does not look good for middle-class South Africans already buckling under high levels of indebtedness and inflation higher than the Reserve Bank's target.

The tweaks to the tax code "will enhance the progressive character of the fiscal system", according to the minister's policy statement. This makes it unlikely that value added tax on consumer goods and services will be increased or that the tax exemptions on bread and fresh produce will be lifted.

According to Sanlam Investments economist Arthur Kamp, the minister's statement "suggests a focus on taxing higher-income earners".

Kenneth Creamer, an economist in the Wits School of Economic and Business Sciences, also sees the possibility of increased tax rates "on consumption and wage earners, particularly high wage earners".

The government has over the past two years squeezed income taxpayers with "fiscal creep" - lifting tax thresholds by less than inflation, effectively grabbing a larger share of their previous year's salary increases.

Nene wants to narrow the budget deficit, which some economists predicted would widen to 4.4% of South Africa's GDP in this mini-budget. But by promising to raise taxes and setting a lower government spending limit, Nene has reined it back to 4.1%.

He said that it could no longer be postponed and that government borrowing at the current level was unsustainable.

"We have reached the turning point," he said.

His predecessor, Pravin Gordhan, warned in February that electricity shortages and the cost of strikes were risks to the Treasury's economic growth forecast of 2.7%.

A strike by the Association of Mineworkers and Construction Union in the platinum belt dragged on for five months, costing Anglo Platinum, Impala Platinum and Lonmin revenue of more than R24-billion, reducing by billions the tax they would have contributed.

The same happened in the metals and engineering sector in July, when a strike stalled production for a month.

"These risks have now been realised," said Nene. Yesterday, the Treasury cut its growth forecast to 1.4%. Without an adjustment it is likely that South Africa's sovereign debt would be downgraded to below investment grade, Treasury stated yesterday.

At current debt levels, interest repayments as a proportion of GDP will escalate sharply from 2017.

"Even after taking the [tax increases and lower spending ceiling] into account, the increase in South Africa's debt-to-GDP ratio between 2009 and 2019 is the highest among its emerging-market peers," according to the Treasury.

Nene wants to stabilise government debt at 46% of GDP by 2017-2018.

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