Matthew Lester: User’s Guide to the Big Five Xmas Dinner money debates

The festive season is here again. And one wonders what the talk will be about at social occasions. Other than cricket and rugby that is.

In my view 2014 has been the worst year in the new South Africa’s short fiscal history. Nothing much has gone South Africa’s way all year. Here are some relevant topics for the conversation on money matters that affect each and every South African. But beware, it is all gloomy stuff.

Conversation 1: The downgrade

On 6 November 2014 Moody’s Investors Service downgraded South Africa’s government bond rating by one notch to Baa1 from A3. The outlook remains negative. South Africa has been on an A3 credit rating since July 2009, but had been on negative credit watch since November 2011.

Some were hoping that the downgrade would be withheld until at least February 2015. This would at least have given South Africa’s new finance minister, Nhlanhla Nene, an opportunity to implement measures to contain the national debt trajectory. But no such luck.

The effect of the downgrade is tangible proof that next year is going to get tough, very tough. South Africa is now uncomfortably close to a junk status sovereign debt rating. The implications of a further downgrade will be very severe for all South Africans.

There are various factors that led to the downgrade. But there can be no doubt that the biggest contributor was the state of South Africa’s national debt trajectory. In 2008 South Africa had virtually no national borrowing requirement. However, since the financial crisis, national debt has increased by R1,25 trillion, about equivalent to a year’s national state expenditure. The annual borrowing rate remains above 4% of GDP despite commitments to reduce the rate to below 3%.


The major cause of the problem has simply been slowing growth rates. Projections made in 2010 indicated that South Africa would recover to a 4% growth rate by 2015/16. This simply has not happened. Most recently the growth rate for 2014/15 has been revised downwards from 2,5% to 1,4%. The resultant effect on corporate tax collections is severe as companies continue to struggle from the effects of the financial crisis.

Of enormous concern is that the National Development Plan is based on a growth rate of 3% if it is to achieve its 2030 objectives.

Finance Minister Nene is going to have to do something about the national debt trajectory or further downgrades in sovereign debt ratings are inevitable. And he has very limited space to work with.

In the medium-term budget policy statement on 22 October 2014 Finance Minister Nene announced a revised plan of action to contain the national debt trajectory. The plan confronts both income tax collections (an increase of R15 billion per annum) and state expenditure (to decrease by R15 billion). These measures will be implemented from 2015. If these objectives can be achieved, the annual debt-to-GDP ratio will slow from 4% to below 3%. This should be sufficient to keep further downgrades at bay.

The stark message this all sends in the financial planning arena is, first and foremost, that the rand is very vulnerable. Obviously this has a profound effect on the investment strategy of any financial plan.

Conversation 2: A long-term bear market?

Many believe that the immediate threat posed by the downgrade is an increase in tax rates. Yes, and we are coming to that. But possibly an even bigger threat is a long-term bear market.

Fewer and fewer South Africans are beneficiaries of defined benefit pension funds. Most of us switched to defined contribution provident funds or retirement annuity funds during the past 20 years.

Defined contribution funds are all very well when they are increasing by 12 to 25% per annum. This generally allows the fund to grow faster than withdrawal benefits. But when pensioners are drawing up to 17,5% of their accumulated retirement capital in a bear market, capital erodes very quickly.

The year of 2014 will be the first in recent times where there will be little growth in retirement capital. For those who can wait for bull markets to return, the long-term effects of nbso a bear market are manageable. But for those already on pension or about to retire, very careful consideration is needed.

It is amazing that in the midst of all the bad news there are still some South Africans considering and even being advised to take early retirement. This is just bonkers. If one has the option to keep working, take it!

Conversation 3: Tax increases 2015

It is now no longer a state secret that tax collections have to increase in 2015 by at least R15 billion. This presumes that the economy remains on its current trajectory. If SARS tax collections for the 2014/15 year are more than R10 billion below the target of R1 trillion, the estimated tax increase for 2015 could even increase by more than R15 billion.

The usual annual increases of fuel and electricity levies and sin tax represent inflationary adjustments. There will have to be a substantial move on the major taxes to achieve an additional R15 billion collection. This can only come from increasing VAT, personal income tax and/or corporate tax rates.

The widely anticipated solution is an increase in the VAT rate or reduction in the extent of zero ratings on basic foods. South Africa’s VAT rate of 14% lags behind most countries by as much as 3%. But please take into account the following line from Finance Minister Nene’s medium-term budget policy statement:

‘Let me be absolutely clear: we will not balance the budget on the backs of the poor. This means that intensive effort has to be focused on achieving the intended savings and maximising efficiency.’

It will be a brave move for the Minister of Finance to cause a substantial dispute with organised labour by increasing the VAT rate or tampering with zero rating.

The company tax and dividend tax systems have been rebuilt over the past 15 years. It will be a substantial and unexpected development to backtrack on the 28% corporate tax rate or the 15% dividend tax rate.

This leaves the unlucky target as being personal income tax (PIT). The contribution of PIT to total tax revenue was 34,5% in 2013/14. The extent of the shift is shown by the fact that while PIT contributed only R28,9 billion more to tax revenue than corporate income tax in 2008/09, it provided R131,4 billion more than corporate income tax in 2013/14.

Recent SARS statistics reflect that of the 5,2 million taxpayers assessed for 2013 there were only 4 million with taxable income in excess of R60 000 and thus liable for tax.

All of this represents a substantial and very significant broadening of the tax base from the 2004 assessed base when South Africa worked on the draconian non-refundable SITE system implemented in the old RSA, specifically to target the lower-income groups.

Now narrow the tax base down further. Only 418 099 taxpayers reported taxable income of greater than R500 000 per annum in the 2013 year of assessment. That is less than 1 in 100 South Africans.

Then the question becomes ‘how much of the tax burden do the wealthy already carry?’

PIT already comprises 34,5% of total tax revenue. And taxpayers with income over R500 000 pay 54% of PIT. So that’s 18,6% of total tax.

The wealthy also make a substantial additional contribution to all other taxes.

Increasing PIT rates for the wealthy will only yield, at most, R5 billion per annum. Thus, if the bulk of the R15 billion needed is to come from PIT it will be necessary to visit the lower-income taxpayers by containing the annual fiscal drag adjustment.

Conversation 4: The delay of the implementation of retirement fund reform

In a surprise move during October 2014 Finance Minister Nene delayed the implementation of the new retirement fund reforms beyond 1 March 2015. There is good and bad news in this announcement.

The bad news is that the proposed overall tax deduction on contribution to all retirement funds of 27,5% of taxable income will have to wait at least another year. Thus contributions to retirement annuity funds remain capped at 15% of non-retirement funding income.

The good news is that the overall capping of contributions to retirement funds at R350 000 per annum will also be delayed. This is a substantial benefit to the high-income taxpayer who can continue to contribute 15% of share option benefits and bonuses until at least 28 February 2016.

It should also be noted that the delay of retirement reform is a delay and is not expected to result in the amendments being permanently off the table.

Conversation 5: E-tolling

The heated e-toll debate still continues unabated. The important aspect is the persistent opposition from Cosatu.

Whatever new tax package is announced in Budget 2015, it will have to create the least possible opposition from organised labour. It is not beyond the bounds of possibility that the e-toll matter could be revisited.

Conclusion

In the glory days of Finance Minister Trevor Manuel, prior to 2008, the National Budget Speech was a premier event in the parliamentary calendar and media. Over the past five years interest has declined as there have been few exciting developments and no sensational good news.

The 2015 National Budget, now scheduled for 25 February 2015, is going to be a very hot topic. The commitment to raise taxes is already on the table. The only question is how Finance Minister Nene is going to implement new measures in a hopefully fair package.

* This article appeared first in The Inside Story, the online publication of Glacier by Sanlam.

This article also appears on www.biznews.com


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