Budget 2016 review

by Lesiba Mothata, chief economist at Investment Solutions

Tax hikes are the main lever the Finance Ministry has used to respond to the challenges faced by South Africa. Debt accumulation, while the Treasury remain committed to keeping it within sustainable levels, has intensified with projections having deteriorated from the 2015 Budget estimates. Economic growth forecasts have been revised downwards while inflation expectations are materially higher. On the expenditure side, the public sector wage bill has been the main focus.

 Higher taxes

Capital gains taxes have effectively been increased by 3 percentage points (from 14% to 16%) for individuals, 4 percentage points (from 19% to 22%) for companies and 6 percentage points for trusts.

 In the real estate sector, transfer duty for properties more than R10 million has been increased by 2 percentage points (from 11% to 13%). In addition to this, the fuel levy has been increased by 30 cents a litre.

 Two new taxes will be introduced for the first time in South Africa: a tyre levy to finance inter alia recycling programs, which will take effect from October this year and a proposed tax on sugar-sweetened beverages, which will take effect from April 2017. Effectively South Africans will pay a tax for buying car tyres and also for consuming beverages such as Coke.

Perils of debt

Due to the depreciation of the rand and higher interest rates, debt-servicing costs have become the fastest growing item of expenditure and income. In a nutshell, for every rand earned by the state, 12 cents is paid in as interest costs. At the same time, the total stock of government debt will exceed R2 trillion in the medium term.

 In the previous budget, net debt to GDP ratio was forecast to stabilize around 44% in the next three years but this has subsequently been revised upwards to consolidate 2 percentage points higher at 46%. The headline (or gross) government debt/GDP ratio which is closely monitored by investors and rating agencies has increased to 51% from 49%. The deterioration in nominal GDP (denominator) has negatively contributed in the worsening ratios.

 The portion of debt denominated in foreign currency remains low for SA at 10% of total debt. The Treasury has showed that non-residents now hold 32% of SA debt which is a notable decline from the 36.4% peak in 2013. It appears foreign investors have sold SA bonds, especially during the latter part of 2015.

 Expenditure consolidation

 The Treasury has pushed its expenditure ceiling lower in response to potentially weaker tax revenues in the future. It also has confirmed that the pace of hiring, especially at the provincial level, has slowed. However, the public sector wage bill remains elevated as the agreements on salary increase are negotiated for a three-year period.

South African runs a fully funded pension system. The Government Employees Pension Fund (GEPF) with assets around R1.4 trillion provides retirement security to about 1.3 million members. Treasury has shown that an increase of 1% in public sector salaries will result in an increase of about R9 billion in GEPF liabilities.

BRICS commitments

 The establishment of the BRICS Development Bank has come at a cost for member states. Each of the five members are expected to make US$2 billion worth of capital contributions. South Africa’s contribution is scheduled to be paid over seven years. So far US$150 million has been paid from the funds raised through the sale of government’s stake in Vodacom.

Offshore tax amnesty

Treasury has invited South Africans who have not previously fully disclosed their offshore investments to participate in the newly announced special voluntary disclosure programme. Individuals and companies, upon lodging an application, receive tax relief under the programme which will last for six months from October 2016 to March 2017.

 Bottom line

The big question raised going into this budget was whether the Minister would be able to turn the tide on the spiraling negative sentiment towards SA and especially on whether a downgrade on SA debt into non-investment grade could be averted. Tax hikes will improve the fiscus in the short-term. However, given that capital gains tax increases have the potential to discourage investments, and also that there were minimal structural reforms announced, the jury is still out on whether the economy can withstand a tighter fiscal and monetary policy.

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