Budget in a nutshell: tax hikes hit South Africans’ pockets hard. South Africans earning more than R1.5m a year will pay an extra R4.4bn to the fiscus
Finance Minister Pravin Gordhan has announced hard-hitting increases in personal income tax of R16.5bn for 2017-18, as economic growth stutters and revenue collection falls short of expectations.
These increases are part of a total R28bn package of tax hikes.
Tax revenue has deteriorated by a further R7bn since the medium-term budget policy statement in October and is now forecast to be R30.4bn lower than the 2016-17 budget estimate, indicating a deterioration in economic growth and tax buoyancy.
This is the largest underperformance since the 2009 recession and Gordhan told journalists at a media briefing ahead of his budget speech in the National Assembly on Wednesday that he was concerned about the state of revenue collection in the country and had been engaging with senior management of the South African Revenue Service (SARS) about this.
In his speech the minister warned SA was “at a crossroads” and “tough choices” had had to be made.
Treasury officials warn there are “significant risks” to revenue collection and economic growth in the period ahead and that these remain high.
The tax increases announced by the minister include a new top personal income tax rate of 45% for the estimated 100,000 individuals with taxable incomes above R1.5m, which will raise R4.4bn. The previous top bracket of 41% was set at R701,301.
Limited relief is provided for fiscal drag; the withholding tax on dividends will increase from 15% to 20% and the general fuel levy, the Road Accident Fund levy and excise duties for alcohol and tobacco will also rise.
Total tax increases of R28bn are required to fill the gaping hole in government finances and are necessary for government to maintain what Treasury described as a “measured, prudent course of fiscal consolidation”. This aims to narrow the budget deficit and stabilise debt.
A further R15bn in tax increases will be announced in next year’s budget.
“The budget reflects a balance between maintaining our spending commitments and ensuring long-term health of the public finances,” Gordhan said.
He said during the media briefing that the global context was “extremely uncertain” but there were promising “green shoots” of hope in the local economy.
There has been no change to the economic growth forecasts the Treasury provided in the medium-term budget policy statement in October: 0.5% for 2016, 1.3% for 2017, 2% for 2018 and 2.2% for 2019.
As is always the case, these forecasts are more optimistic than the forecasts of economists and the Reserve Bank, and are critical for Treasury’s construction of the budget.
The consensus of economists surveyed by Reuters is 1% growth in 2017, 1.6% in 2018 and 2% for 2018, while the Reserve Bank forecasts 1.1% for 2017 and 1.6% for 2018.
Treasury concedes in its budget review that “lower economic growth remains a significant risk to the budget”. It expects inflation to remain outside the inflation targeting band at 6.4% this year, falling to 5.7% next year.
Budget deficit and government debt
The consolidated budget deficit as a percentage of gross domestic product (GDP) is unchanged from the October forecasts except for the outer years. It remains at 3.4% for 2016-17 and 3.1% for 2017-18 but slips to 2.8% in 2018-19 and 2.6% in 2019-20, from the previous forecasts of 2.7% and 2.5% respectively.
Government will have to raise R149bn to meet the deficit and will pay R169bn in debt service costs on R2.2-trillion (50.7% of GDP) of debt this year. Gross debt to GDP is expected to rise from 50.7% in 2016-17 to 52.3% in 2017-18 and again to 52.9% the following year.
A public sector borrowing requirement of R251.7bn or 5.3% of GDP is forecast for 2017-18, sliding to R237bn or 4.6% in 2018-19.
Revenue of R1.44-trillion is forecast, a 7% rise over last year but R30bn lower than previously anticipated.
The revenue shortfall is mainly in personal income tax (R15.2bn), value-added tax (VAT, R11.3bn) and customs duties (R6.5bn), reflecting lower growth in wages, employment and bonus payouts.
Treasury has warned of the “heightened risk” of further deterioration in revenue collection if economic growth continues to lag behind forecasts. Tax buoyancy — the relationship between gross tax revenue collections and economic growth — has deteriorated over the year.
Gordhan noted that applications under the special voluntary disclosure programme, which allows taxpayers to declare their hidden assets abroad, had begun, concluding at end-August. SARS had already received disclosures of R3.8bn in foreign assets, which would yield revenue of about R600m, according to the budget review.
The proposed new top personal income tax rate of 45% for the estimated 100,000 individuals with taxable incomes above R1.5m will raise R4.4bn. The previous top bracket of 41% was set at R701,301.
Limited relief of R2.5bn for fiscal drag of R14.6bn will raise R12.1bn more in tax. An increase in the withholding tax on dividends from 15% to 20% will raise R6.8bn.
A further R5.1bn will be raised by an increases of 30c/litre in the general fuel levy (R3bn), 9c/litre in the road accident fund levy, and in excise duties for alcohol and tobacco of between 6% and 10%, which will raise R1.9bn more.
Tax breaks: higher threshold for transfer duties on house purchases; higher threshold for tax-free savings; higher medical scheme tax credits
The primary, secondary and tertiary rebates and the levels of all the taxable income brackets will increase by 1%, and the tax-free threshold rises slightly from R75,000 to R75,750.
The tax proposals also include an increase in the threshold for the payment of transfer duty on house purchases from R750,000 to R900,000. This will cost the fiscus R448m in tax forgone.
The annual allowance for tax-free saving accounts will be increased to R33,000 while the medical tax credit will be increased for the first two beneficiaries from R286 to R303 a month, and for remaining beneficiaries from R192 to R204 per month. Government guarantees to public institutions now amount to R478bn.
Government expenditure remains within the envelope projected in the 2016-17 budget. However, the main budget noninterest expenditure ceiling has been lowered by R26bn over the next two years, as was outlined in the medium-term policy statement.
This will mean trimming noncore goods and service budgets as well as the compensation for government employees.
Gordhan noted that expenditure limits were “tight”. Real growth in noninterest expenditure will average 1.9% over the next three years, down from the 2.3% real annual average growth between 2013-14 and 2016-17.
Total noninterest government expenditure is projected to remain stable at 26.2% of GDP over the medium term. There has been little change in expenditure plans from the medium-term statement.
Expenditure amounts to R1.56-trillion with R30bn being reprioritised to protect social expenditure. Of this R16bn is allocated to higher education over the next three years. An additional R5bn is allocated to higher education in 2019-20, in addition to the total of R32bn over three years which was announced in both last year’s budget and the medium-term statement.
Apart from debt service costs (R162.4bn), post-school education (R160bn over the next three years for universities and student funding) is the fastest-growing part of the budget, followed by health (R606bn) and social grants (R490.4bn).
Student funding: spending on post-school education is the second fastest-growing item in the budget
Basic education is allocated R752bn over the next three years while compensation for government employees will cost R550bn in 2017-18 and Treasury is looking at how it can reduce employee numbers.
Public sector infrastructure spending will amount to R947bn over the next three years — with R307bn budgeted for 2017-18 — but will be trimmed in the outer years on projects where there has been underspending.
SAA: A ‘deficit-neutral’ cash injection for the ailing airline is on the cards
A cash injection for SAA is also in the offing but Treasury director-general Lungisa Fuzile stressed at the media briefing that this would be extended in a deficit-neutral way.
Of the total national budget, 47.5% is allocated to national government, 43.4% to provinces and 9.1% to local government.
Economic affairs and agriculture gets R241.6bn, defence and public safety R198.7bn, education R320,5bn, health R187.5bn, local development and infrastructure R195.8bn and social protection R180bn.
The provision for a contingency reserve of R6bn in 2017-18, R10bn in 2018-19 and R20bn for 2019-20 remains unchanged from the medium-term policy statement.
Sugary beverage and carbon taxes
Gordhan said further consultations were taking place on the tax on sugary beverages and the proposed design was being revised to include both intrinsic and added sugars.
“The tax will be implemented later this year once details are finalised and the legislation is passed,” Gordhan said.
Sugar tax: this is definitely coming, but 100% fruit juices and milk products will be exempt, and there will be further consultation
Treasury deputy director-general Ismail Momoniat told journalists that Treasury proposed to introduce a threshold that would make the first 4g of sugar per 100ml beverage exempt from the sugar tax. He said 100% fruit juices and milk products would be exempt.
The proposed carbon tax and its date of implementation would be considered further in Parliament this year, the minister said.