Nazmeera Moola – co-head of fixed income, Investec Asset Management
“Around R45 billion of tax hikes and spending cuts are needed in the fiscal year that starts 1 April 2018 to stabilise the South African fiscal outlook. With free tertiary education weighing on the fiscus, it will be difficult to achieve the R31 billion in expenditure cuts that were planned. At most R15 billion is likely.
“Therefore, tax hikes of around R30 billion are needed. Last year, personal income taxes bore the brunt of the adjustment, with very little offset provided for inflation in the tax brackets. As a result, households earning from R350 000 per annum saw a decline in real wages due to limited tax relief for inflation. While that manoeuvre can be repeated this year, it is woefully inefficient – and did not raise nearly the amount of expected revenue in 2017. A far better option is to hike Value Added Tax (VAT) by at least 1%.”
Tsitsi Hatendi-Matika – market analyst, Absa Wealth and Investment Management
“VAT has been a lever that the National Treasury refused to pull for years, likely because of its political consequences, but a 2% increase in VAT would create the much required cash. An increase in VAT is expected to signal government’s commitment to addressing the issue of fiscal slippage.
“An alternative to increasing VAT in a linear manner would be to remove the zero rating for VAT on fuel sales. We anticipate that this could raise up to R18 billion. Given that this would increase the retail price of fuel, if not offset by a cut in the General Fuel Levy, this means that National Treasury would need to get creative around this for it to be palatable for consumers.”
Tracy Brophy – chairperson of the South African Institute of Chartered Accountants Tax Committee
“Even though the personal income tax taxpayer base is small (it is estimated that around 80% of personal income tax is being paid by 25% of the personal income tax taxpayers), it would appear that this base remains a popular target for tax increases despite it arguably having reached the point of diminishing returns. A way of targeting this base without adjusting the personal income rate any further is by increasing the existing so-called ‘wealth taxes’ – estate duty (20%), donations tax (20%) and capital gains tax (CGT) (40% inclusion rate resulting in an effective rate of 18% for the top bracket which are taxed at 45%).
“Even though the Davis Tax Committee has only recommended an increase in estate duty to 25% and an increase in the CGT inclusion rate for corporates (from 80% to 100%), there is nothing preventing an increase to 25% for both estate duty and donations tax and an increase in the inclusion rate for CGT to either 50% or 60% (taking the effective CGT top rate to 22.5% or 27%).”
Lullu Krugel – chief economist for PwC Africa
“The finance minister must navigate an intricate balancing act between bailing out state-owned enterprises (SOEs) and dealing with credit ratings agencies threatening more ratings downgrades. Ideally, SOEs should not require recurring cash injections from the state. While the government is the main shareholder in these entities, shareholders of other big companies are seldom asked to make annual contributions to the financial wellness of these corporations.
“The 2018 budget needs to set in motion tangible plans to achieve President Ramaphosa’s ideal of restoring SOEs as drivers of economic growth and social development. Proper accountability structures will improve the quality of governance at these companies which, in turn, would aid the financial health of SOEs. Improved financial management would eventually translate into improved credit ratings which, in turn, will encourage a greater volume of financiers to invest in SOEs. The result will be a decline in fiscal exposure to the performance of SOEs. Looking beyond Budget 2018, President Ramaphosa is looking to undertake a process of consultation with a variety of stakeholders to comprehensively review the funding models of SOEs.”
Arthur Kamp – economist, Sanlam Investments
“The Treasury should help change expectations of further sovereign debt rating downgrades into expectations of sovereign debt rating upgrades. It can go some way towards achieving this by emphatically shifting government expenditure towards investment in infrastructure and human capital and away from government’s wage bill. This will not only make a contribution to South Africa’s potential growth rate, but will also help protect the state’s balance sheet as borrowing is directed towards the accumulation of capital rather than consumption. Critically, expenditure on human capital includes health and education, which necessitates sharp cuts to government consumption spending. Failing this, the expenditure burden is likely to prove too much for our economy to cope with.”
Craig Pheiffer – chief investment strategist, Absa Stockbrokers and Portfolio management
“The story delivered by the finance minister needs to be achievable and believable and it must talk to a definite return to fiscal consolidation. It’s going to be a tough ask to get the budget deficit below 3% over the next three years, but Treasury must show a firm commitment to reducing the deficit over the three-year budget framework. Anything short of that will see Moody’s downgrade our country’s rating to sub-investment grade in a short space of time.”
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