Big tax 'klap' coming

27 October 2016 - 08:22 By BIANCA CAPAZORIO, JAN-JAN JOUBERT, SIPHE MACANDA and BABALO NDENZE
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SHAKEN, NOT STIRRED: Finance Minister Pravin Gordhan greets President Jacob Zuma after his mini-Budget speech in the National Assembly yesterday.
SHAKEN, NOT STIRRED: Finance Minister Pravin Gordhan greets President Jacob Zuma after his mini-Budget speech in the National Assembly yesterday.
Image: ESA ALEXANDRA

Finance Minister Pravin Gordhan's medium-term budget policy statement has been hailed by politicians and analysts as a win in the battle to reassure credit ratings agencies and avoid a sovereign credit downgrade.

But some economists have slammed tax increases mooted for next year, saying middle and top income earners were being squeezed.

In the National Assembly yesterday Gordhan walked a tightrope of cutting back on public expenditure, raising taxes and finding money to allocate to the free tertiary education demands in a bid to appease protesting students who have been protesting under the #FeesMustFall banner.

Gordhan allocated an additional R9-billion to the National Student Financial Aid Scheme and another R8-billion to meet the costs of fee increases for students from households with incomes up to R600,000.

He painted a grim picture: Growth has been revised down from a projected 0.9% to 0.5% in a subdued global economic climate.

Xhanti Payi, an economist at Nascence Advisory and Research, said the speech would reassure credit ratings agencies that were closely monitoring developments in the country and were due to announce whether the sovereign rating of South Africa would be downgraded to junk status, which would make it difficult for the country to borrow money.

"He went into detail talking about how we are going to increase revenue and receive more taxes. He touched all the important things that rating agencies want to hear from him," Xhanti said.

He said that even though it would take some time to grow the economy, Gordhan went far enough to address key economic issues.

"All the other things are not part of what he can do. He cannot do anything about the politics of the country. With #FeesMustFall he went as far as he could, given the resources. I think it would have been unreasonable for anyone to think that he would have announced that we are going to get free education," he said.

The country is also spending more on servicing debt and greater demands are being made on the public purse, while national revenue is declining.

And now Gordhan has hinted at tax hikes next year.

But economist Mike Schussler raised concerns about the possibility of tax hikes.

"I think we are getting close to a situation where we will not meet any target. We have a downward growth forecast. Secondly, they said four years ago that the country's debt to GDP (ratio) won't exceed 38%. It's now sitting at 48%," said Schussler.

He said South Africa needed to "relook at itself".

"Every time we get to this place, we get tax increases and the middle and top are getting squeezed. The [middle class] are not getting back what they should be getting back," said Schussler. He said most people had become "punch drunk" with all the tax. "That's a big concern of mine. We've had almost R43-billion in tax increases."

Gordhan said a ratings downgrade could be avoided.

He said the country needed to "make the right choices" and "work like hell" to build consensus, create investor confidence and encourage political stability.

He said there were signs this was already working, and if it continued, could "start generating real, inclusive growth".

He said although growth was down this year, it could be expected to grow to 1.7% or "even better" next year. Deputy Finance Minister Mcebisi Jonas said while it was not a popular opinion, "better managing our politics" is necessary.

"Any slight sign of political noise is likely to have an impact on growth," he said.

To fund increased pressure on the state for services, South Africa would do well to prepare for significantly higher taxes next year.

The government proposes tax measures to raise an additional R13-billion next year.

It also intends to reduce the expenditure ceiling by R10-billion next year. This comes on the back of government debt now exceeding R2-trillion for the first time, a growing portion of spending having been funded by borrowing since 2009.

Gordhan raised concerns about financial management and governance of state-owned companies.

Poor management at Eskom, SA Airways, the Post Office, state railway operator Prasa and the SA National Road Agency Limited has cost South Africans dearly and placed a strain on the economy, the national treasury has admitted.

In supporting documentation the Treasury says these state-owned companies "could pose risks to the country's public finances".

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