The Budget Speech Postponed | A Planner View

The Budget Speech Postponed | A Planner View

This week saw the postponement of our National Budget speech.

Considered responses on the postponement ranged from being especially awkward and embarrassing for us as a country - to being a healthy sign of a working coalition government deliberating bread-and-butter politics. 

From a personal planner's point of view, one accurate barometer is the reaction of the Rand currency and the JSE, both of which were reasonably muted.

By the close of business yesterday, the Rand/$US was slightly stronger than a week ago (R18,34 at yesterday’s close, being slightly stronger than the R18,46 last Thursday, or R18,41 last Friday).   

And the JSE over the last week is up just over 1% to the end of yesterday.

What we Know

The said intention to hike VAT by 2% was considered to fund the annual budget shortfall, which works out to an estimated R30 billion to R60 billion.

South Africa has 28 million people on grants, which were proposed to be increased overall.

A few added concessions were to increase the number of VAT-exempt items - but I found this too light, meaning that grants would be payable to people in need, only for them to effectively pay the best part of 17% back to Fiscus via VAT. At first glance, everyone would agree that this simply doesn’t make sense.     

For a simple explanation of what transpired in the postponement, Whackhead (Darren) Simpson on KFM summarises in a short interview with economist Dawie Roodt;

How Much is This Relative to the Budget

In very round terms, our Budget is just over R2trillion per annum, and on an estimated R30 billion to R60 billion shortfall, this is around 3% of the national budget.  

SA has 7,4 million taxpayers, so if only private individuals had to pay this shortfall, it would work out at R4 000 and R8 000 per person for the year.

Given this perspective, one would think that it’s a workable shortfall.  

Higher Individual Taxes Seen as Not an Option

Due to the “Laffer Effect”, where SA individual tax rates are already high, it’s questionable that higher income tax rates for individuals would lead to higher revenue collections.   

South African Revenue Service (SARS) Commissioner Edward Kieswetter stated two years back that tax rate increases for individuals from current levels are not the answer to the government’s budget deficit and could do more harm than good. For this reason, we have not seen an increase in the tax bands over the last two years.

Source: Tax increases, not the answer – Edward Kieswetter – Daily Investor

This was again acknowledged in this year’s leaked budget proposals, where SARS initially released the tax tables with good relief for the lower two tax bands (see below how this was proposed to tie in with the 2% VAT increase) and the same bracket relief for the higher income tax bands.

SARS withdrew these tables from their website on Wednesday when the Budget Speech was postponed.

What was the Treasury Motivation behind the proposed 2% Increase in the VAT Rate?

I see that the reasons for the Treasury team even proposing increasing VAT got little to no media attention or expert commentary.

VAT is seen as a regressive tax, as lower earners spend far more of their budget on Vatable goods than the wealthy.

Simply said, “The poorer you are, the more a VAT increase affects you”.

Supporting explanation via the Daily Maverick:  What a 2 percentage point VAT increase would cost SA households

SARS have over 26 million registered taxpayers, yet only 7.4 million are paying Income Tax.

Further Difficulties Around Increasing Income Taxes

The key matter to many is a bloating Government cost base via inefficiencies, corruption, and looting.

In addition to this, from a wider, bigger picture macro point of view, raising taxes to cover this year and the next is not the solution, as it will stifle economic growth.

And this is exactly what we as a country need, greater economic growth around at least the 3% per annum for our Growth Domestic Product (GDP), that our President highlighted in his State of the Nation (SONA) speech a fortnight ago.     

Direct vs Indirect Taxes

The first Finance Minister, Trevor Manual, introduced the theme of increasing indirect taxes, as opposed to direct taxes, over two decades ago.

At that stage, in the early 2000s, SARS only had 4 million taxpayers, meaning that Old Mutual at the time had more policyholders than SARS had taxpayers.

An overall approach of increasing indirect taxes was adopted to widen the tax base, where many persons simply did not pay taxes (which was supported by businesses having more cash earnings).  

This was done via VAT, and fuel levies were the most obvious.  The intention of the Treasury over the years has been simply to widen the tax base.  

The same applies to property rates and taxes, municipal costs, electricity, etc. – the point is that these are all taxes (merely by another name) and, more specifically, indirect taxes.  That they are more frequent reminds us more often of them and can also make us more emotional when thinking about them.

Looking at the pure numbers, simply said - indirect taxes keep our direct taxes far lower, simply as there are far more people paying these.  

I recall back in 2016 when Pravin Gordhan, after increasing sin taxes and the fuel levies in his Budget Speech, the evening afterwards said:  “If you are taking your larger 4x4 to fill up at the petrol garage and keep the tyres pumped to save on the new tyre taxes, and on the way light up a cigarette and open a can coke - you’ll be neatly helping Fiscus smartly to reach our future income targets”.

In this proposed speech, our Financial Minister had to be more careful about the fuel levies, as any increase here would be directly inflationary, which hurts lower income earners the most. Treasury is very aware of this.  

The overall intention was clearly to cover the budget shortfall via higher VAT rates, not direct income taxes.

I am not a proponent of VAT increases from current levels, accompanied by a long(er) list of exemptions, - where I believe this will only be clumsy.

However, I think it is important to understand where the Treasury was coming from.   

How Lower Earners and 28 Million Grant Recipient Earners Were Supposed to Afford the 2% VAT Hike

From the National Treasury’s point of view, in widening the tax net through the higher VAT rate, they felt they needed to provide for lower earners in the bottom tax brackets and 28 million grant recipients.

The Treasury considered this by first giving a substantial increase in relief to the tax rates for the bottom two tax brackets - that would offset the VAT increase for these taxpayers.

Grant recipients, in turn, would also have seen increases that, in the Treasury’s opinion, were sufficient to cover the higher VAT rates.

All of these provided for the rest of the country would see a 2% VAT hike, thereby simultaneously widening the tax net. And at the same time, given the current “Laffer Effect”, the wealthy would find this palatable.             

In terms of the draft budget that was rejected by the cabinet, “SA’s economy is projected to grow by 1,9% in 2025, rebounding from 0,8% in 2024, as investor confidence improves, electricity supply stabilises and borrowing costs ease”.

A wider tax net, with a higher VAT rate on a growing economy - would have given the needed added income required, and relief is arguably given to those who need it.

What Markets Liked

The overall market expectation before the time was to see:

· Continued strong emphasis on fiscal consolidation, i.e. Tight expenditure control (esp. public sector wage bill, social (& Covid) grants & SOEs).

· No large SOE support.

· The Covid grant has already been extended to the end of March 2027.

· Continued emphasis on reducing govt debt/GDP ratio.

1. No populist policies or spending measures.

2. No BIG (Basic Income Grant) in its original envisaged form.

3. No tax increases (apart from fuel levy, and sin taxes – and no fiscal drag relief.

Markets favoured our Finance Minister's commitment to fiscal consolidation, and thereafter meeting most of these.

He must next change the “how” and not detract from this strong commitment to balance the books, which is a very encouraging sign, that markets liked.       

Budget Speech on 12 March

The shortfall needs to be addressed; while the proposed Budget balanced the books, it would have delivered short on the President’s SONA speech, where he rightly said we need to at least match other Emerging Market countries, achieving at least 3% per annum annual (GDP) growth.     

Overall, even after a good 2024 sorting many of our problems at home with less inflation, load-shedding, corruption and so forth - the next element needed and dare I say non-negotiable, will be economic growth.    

The lacklustre current low SA GDP Growth = need first to create stability in a calm and rational approach = balance the books = keep rating agencies happy and improve these over time = keep the currency stable = the background environment required for foreign investment into SA = new investment = economic growth = jobs = lower future deficits = financial prosperity over many years.

I hope the revised Budget, earmarked to be delivered on 12 March, will align closer to the President's SONA Speech and introduce growth measures and policy certainty to support business leading our country to 3% annualised growth in coming years. We need it.

Retirement Annuity (RA) and Tax-Free Savings Account (TFSA) last chance!

With most product providers having cut-off times on Wednesday this week, time is running out fast to ensure that your contributions to your retirement annuity (RA) can take full advantage of the current tax Year’s deduction regime.

I’ve been writing an article each year for the past nine years on how beneficial it is to invest in RAs. All the benefits still exist, and they are even better than they used to be. Here is the 9th edition of my article, THE VALUE OF RETIREMENT ANNUITIES 2025

The 2024/2025 year of assessment ends on 28 February 2025. This means you only have until the middle of next month to make additional (tax-deductible) contributions to your RA fund or a lump sum (tax-deductible) contribution to a new RA fund if you don’t already have one.

Don’t miss this opportunity to maximise your tax deduction and boost your retirement savings. Also, don’t leave it until Feb 27th to decide to make additional contributions. The product providers have strict cut-off times and if you miss the boat, you miss the tax you could have saved.

If you are not sure what an RA or TFSA is or are still on the fence about making the extra contributions, have a look at this Retirement Annuities And Tax Savings For 2024 - 2025 we wrote about the benefits of each of them and why everyone is SA that pays tax should at least have a RA.

If you already have enough to retire on yourself, reducing your estate by making TFSA contributions for kids or any other people you care about is a great way to reduce your estate duty. You could create generational wealth with only R36,000 paid into this investment until the lifetime allowance of R500,000 is used up.

FRIDAY FOOD FOR THOUGHT