By: Ettiene Retief,
Chairperson of National Tax and SARS Committee of the South African Institute of Professional Accountants (SAIPA)
In light of recent political and social instability, the 2016 medium term budget speech is on everyone’s mind. The fact that the presenter, Finance Minister Pravin Gordhan, is facing corruption charges only adds to the uncertainty that clouds the nation’s economic outlook.
From a national perspective, earnings are predominantly derived from taxes, and each year there is a need to collect even greater taxes. The last several years, projected revenue growth has been low but always positive, even if only in fractions.
However, recent events threaten to send the economy into a negative trend. These include the aforementioned corruption charges, the allegations of political motives behind the charges, the potential economic impact of an extended #FeesMustFall campaign, what’s being described as the worst drought in our history, a consistently high rate of unemployment, and an almost certain looming downgrade to junk status by global credit authorities. So to what extent should we expect projections to be adjusted downwards and what new economic outlook should we be prepared for?
The #FeesMustFall campaign has had a serious impact, and could further harm the country if the 2016 academic year is lost, as we already have a shortage of skills and qualified people. To compound the problem, free tertiary education is unlikely to be sustainable, or the ideal circumstance in ensuring quality education. Will the Minister weigh in on this matter at this point in time?
With respect to a downgrade, one must bear in mind that there are several levels below junk. Some analysts predict a drop of perhaps 2 or 3 levels to a much lower investment status. Ultimately, a downgrade will have 3 notable effects on South Africa:
First, fewer organisations or countries will be willing to invest in an economy where their expected return may not be realised, or the perceived risk is too great.
Second, lack of investment and labouring economic weakens the Rand, making it more expensive for us to trade. This carries further penalties such as increases in fuel costs or the general cost of living. With increased inflation, there is a likely increase in interest rates.
Third, because our loans and repayments are denominated in foreign currency, a weaker Rand means we’ll spend more on servicing debt and have less for other budgetary ambitions, like infrastructure development. Also, a downgrade will increase the debt financing costs.
Fourth and most important, we’ll face limitations on how we fund shortfalls in the budget.
So there are a number of direct and indirect compounding effects in terms of direct foreign investment, currency volatility and trade. These are all issues we should want to see reviewed in the Finance Minister’s statement.
The most important news to listen for is the adjusted projection of the economy and revenue collection target. Also, to what extent has the potential downgrade been budgeted for?
Although the speech is generally not the forum for fundamental changes to tax laws, there are often clues that give a sense of what’s to come. Can we expect certain taxes to be increased, will the VAT rate increase, and will we meet our current revenue targets?
Of course, we would ultimately want to know what any revised economic outlook will be. The economic outlook also plays a part in determining the potential downgrade.
What we shouldn’t be hearing is the word “recession”. Technically, a recession requires 2 concurrent periods of negative growth. Even if a contraction of the economy is on the cards, we’re not at that point yet.
The upcoming Reserve Bank sitting may prompt an increase in interest rates to curb spending and moderate inflation.
Overall, the outlook is somewhat bleak. Ultimately, the government needs to work harder to improve its reputation and deliver real economic stimulus. As Gordhan himself recently stated: it will take good leadership and higher levels of commitment.