South Africans can expect significant tax increases next year

Significant tax increases are in the pipeline next year as the Treasury grapples with sluggish economic growth‚ student demands for free education and lower revenue collection.

Despite the constraints‚ the medium-term budget policy statement tabled in Parliament by Finance Minister Pravin Gordhan on Wednesday has allocated a massive R17.6bn more than projected for post-school education and training over three years. This is in addition to the R16bn added in February. The money will be used to subsidise the fee increases for poor households. The policy statement has also signalled straitened times for government departments‚ which will be required to cut back on their spending‚ particularly on employees. Despite the difficulties‚ Gordhan stressed at a media briefing ahead of his speech to MPs that SA was not in a “hopeless” situation‚ as long as it created a situation of policy certainty and economic stability for investors. He believed the Treasury had produced a package of tradeoffs that‚ if properly implemented‚ would satisfy the credit rating agencies that the government was on the right fiscal path. “What we are talking about is surviving the next two years or so‚” Gordhan said. It would be essential to build consensus and create political stability. As the Treasury looks for more revenue to compensate for lower tax revenue — this year there will be a R23bn revenue shortfall — it is planning additional tax increases of R13bn in 2017-18. This is over and above the R15bn announced in the February budget‚ bringing total tax increases next year to R28bn‚ with another R15bn being pencilled in for 2018-19. Taxpayers already bore R18bn in tax increases this year and it will be hard for Treasury to impose more on them except perhaps indirectly by way of not compensating for fiscal drag. Corporate tax hikes are not feasible in the current globally competitive environment and so a politically unpalatable increase in value-added tax might have to be considered. However‚ the form the proposed tax increases will take will be announced only when the finance minister tables the 2017-18 budget next February. Gordhan said the Treasury had adopted a “measured‚ balanced‚ careful” approach to fiscal consolidation‚ which did not cut government expenditure too drastically and did not kill off the “green shoots” of growth. At the same time the medium-term budget policy statement also focuses on reducing the budget deficit and stabilising debt. Slow Growth The Treasury forecasts growth to slow to 0.5% this year — compared with 0.9% projected in February. The economy is forecast to grow to 1.3% next year‚ 2% in 2018 and 2.2% in 2019‚ though Treasury has conceded that its forecasts have historically tended to be somewhat optimistic. It also warns that slower growth represents a “significant risk” to the fiscus. The budget deficit is now projected at 3.4% for 2016-17 instead of the 3.2% forecast in the February budget and is projected to fall to 3.1% in 2017-18‚ 2.7% in 2018-19 and 2.5% in 2019-20. Gross loan debt as a percentage of gross domestic product — closely watched by credit ratings agencies — has crept up to 51.3% for 2016-17 from the budget forecast of 50.9% and is set to rise further to 52.5% in 2017-18 and 53% in 2018-19. Debt service costs this year will amount to R148bn. Treasury director-general Lungisa Fuzile said it was time that debt stabilised to reduce debt service costs. Tax revenue this year is expected to be R23bn lower than the budget estimate due to slower economic growth. To deal with this shrinkage in available resources‚ the Treasury has reduced the expenditure ceiling. Noninterest government expenditure is expected to grow by an annual average of 1.2% in real terms over the medium term. Government expenditure will be R10.6bn lower this year than the budget forecast‚ including underspending of R4.3bn. The Treasury plans to cut spending next year by a further R10bn in addition to the R10bn cut announced in February‚ and by a further R16bn in 2018-19 in addition to the R15bn already projected. Savings and the use of the R6bn contingency reserve set aside for this year will help to address the shortfall in tax revenue. The contingency reserve for next year has been reduced from R10bn to R6bn. Government departments will be expected to “moderate” their head counts and reduce the number of employees through attrition. The Treasury is looking at a reduction of about 25‚000 public servants over the next three years‚ though more will be required if wages rise sharply. Gordhan stressed that this was a “critical” area that departments would have to address. Departments will be required to cut their operating budgets by 1.1% annually‚ resulting in a R5bn saving over three years; transfers to some public entities will be cut by R5.6bn over three years; large conditional grants to provinces and local governments will be slashed by R6.4bn; and the provincial equitable share will reduced by R1.6bn‚ giving a total saving of R18.7bn over the period. #FeesMustFall To address student demands‚ the Treasury plans to increase university subsidies at an annual average rate of 10.9% and its allocations to the National Student Financial Aid Scheme (NSFAS) by 18.5%. The government will fund the increase in fees at higher learning institutions for 2017 up to a maximum of 8% for students from households earning up to R600‚000 a year. This is expected to cost R2.6bn and NSFAS will be allocated R2.4bn. The budget policy statement noted that company income tax had performed robustly to date‚ mainly driven by higher provisional tax from the mining and quarrying sector. Personal income tax was lower than anticipated and would not reach the target. VAT refunds at the beginning of the tax year offset gross VAT collections‚ which were performing sluggishly. Public sector infrastructure spending of R987.4bn is planned over the next three years. TMG Digital/BusinessLive