MTBF Policy Statement – the double deficit explained

The Medium Term Budget Policy Statement ‘MTPS’ in October every year, sometimes known as the mini-budget, does not receive as much attention as the National Budget Speech in February.

This is indeed a pity, as in many ways the MTPS provides much information that is not readily available in the National Budget Speech, especially when the MTPS is read with the release of the annual SARS statistics report.

 South Africa’s problem in a nutshell

In the history of RSA tax, Finance Minister Trevor Manuel, could perhaps be described as ‘a great batsman on an easy wicket. Somewhat like Jaques Kallis but never as dull as Kepler Wessels.’

Prior to 2008, driven by growth rates above 4% per annum, South Africa’s tax engine was firing on all cylinders. The going was easy for Trevor Manuel.  But South Africa’s national budget contained no contingency for the slowing of economic growth that emerged from the aftermath of 2011.

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Source:- SARS Statistics 2013

So much for those famous words ‘the after-effects of the financial crisis will be short lived.’ The slowdown in the recovery rates post 2010 was not anticipated and has had a profound effect on tax collections, particularly corporate tax.

Prior to 2009, with the economy growing at 4%, there was space in the National Budget to reduce the corporate rate from 35% to  30% in 2000 and to 28% by 2008.

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Source:- SARS Statistics 2013

Post the 2009 recession the weakening within the mining and manufacturing sectors have left corporate collections under pressure.

The 2013 SARS statistics clearly reflect the extent of the mining sector tax disaster with total corporate tax collections falling from R14 billion pre the financial crisis to negligible proportions (net of VAT refunds) by 2010. The recovery to R8 billion by 2011 was short-lived and collections dropped to shy of R4 billion by 2012. The Marikana tragedy alone has cost the taxpayer R12 billion.

The manufacturing and retail sectors have struggled to maintain their total tax contribution at around R50 billion per annum.

Currently there may be 2,2 million companies in RSA.  Many are dormant or defunct. Only 743 000 are liable to submit returns. By 2011 nearly 200 000 reported assessed tax losses. Nearly 4 000 reported assessed tax losses of greater than R10 million.

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Source:- SARS statistics 2013

It is quite staggering that more than 60% of South Africa’s corporate tax is paid by a mere 481 companies reporting taxable income of more than R100 million per annum.

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Source:- SARS tax statistics 2013

Fortunately South Africa is not as heavily dependent on mining taxes as many would believe. In the 2012 mining and quarrying corporate tax collection was a mere 10% of the total corporate tax collection. But one must never lose sight of the knock-on effects beyond the mining sector that are difficult to measure.

The situation has been rescued to some extent by the financial sector that has showed remarkable resilience, reporting 36,8% of the corporate tax collection and total sector tax collections (including personal income tax and VAT) increasing through the financial crisis to R220 billion by 2012. But the financial sector cannot take all the credit.

Pravin Gordhan, whilst SARS Commissioner of SARS, made it his mission to close down the aggressive tax practices of the financial sector. Had he not achieved this, corporate tax collections would be a complete disaster today. And there would be no prospect of other taxes making up the shortfall. South Africa would be, were it not for Pravin Gordhan, already in its own financial crisis.

Personal Tax collections have helped steady the boat. The SARS campaign to register every employee has yielded dividends with the personal tax register growing to 15,4 taxpayers. 5,4 million taxpayers now exceed the tax threshold. If this is coupled with higher than inflation wage increases, personal income norske- norske spilleautomater . tax collections can reach budgeted levels in spite of the increase in the unemployment rate to 25%. But the Trevor Manuel days of massive over-recoveries of personal tax making up for under-recoveries in other taxes are clearly over.

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Source:- SARS statistics 2013

There is a widespread misconception that the wealthy minority of South Africans pay the majority of the tax bill. The SARS statistics now reflect that 49% of South Africa’s personal income taxes are paid by taxpayers with taxable income exceeding R500 000 per annum.

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Source:- SARS Statistics 2013

The disparity of wealth across South Africa is quite remarkable with Gauteng and the Western Cape contributing 66% of total personal income tax collections. Yet the two provinces comprise only 36% of South Africa’s population. This leaves 64% of the population, by province, paying 34% of personal income tax.

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Despite lagging consumer demand, VAT collections are remarkably still on track. This is indeed fortunate as VAT collections suffered a major blow following the 2009 recession.

Many commentators suggest that the solution to South Africa’s tax shortage would be to increase the VAT rate from 14% to 17,5%. There is merit to this argument as South Africa has a comparatively low rate by international standards. However this argument is perhaps academic as an increase in the VAT rate is not a politically acceptable prospect.

The important point remains that RSA has 3 major taxes, Corporate Income Tax, VAT and Personal Income Tax, totaling more than 80% of total tax collections. If there is a problem in any one of the ‘Big 3’ the remaining smaller taxes cannot make up the difference.

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Source: National Budget Review 2013,ML adaptation

The above graphic demonstrates the priority focus of current national budgeted expenditure towards the provision of social security for all South Africans. However a legacy of our past remains that the vast majority of South Africans cannot afford social security tax. Many countries place heavy reliance on social security tax as the fourth tax, thus reducing reliance on other taxes, particularly corporate tax.

Reduced corporate tax collections are the principal reason for South Africa’s higher than comfortable national debt levels. In February 2012 Pravin Gordhan made the commitment to reduce the national debt level from 5% of Gross Domestic Product to -3% by 2015. In February 2013 the 3% target was pushed out to 2016.

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Source: National Budget Review 2013

Perhaps the above graphic is the most controversial aspect of the South African economy as it displays the trajectory most criticized by the international rating agencies.

The Double Deficit’

Reserve Bank Governor Gill Marcus is well aware that an increase in RSA interest rates will wreck the already fragile South African economy. The Reserve Bank steadfastly refuses to increase interest rates to compensate for increased risk profile created by the debt trajectory, coupled with lower economic growth, labour market uncertainty and looming elections in 2014.

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Source:- Inetbridge, ML

 The premium attached to short-term investment in RSA deposits has dropped since 2007. Yet there is sound argument that South Africa’s risk profile has increased. When this is coupled with the international investment deleverage, foreign investment in short term RSA interest is declining. The situation is aggravated by the Marikana tragedy and a prolonged 2013 strike season.

Exports have been weak during 2013. In particular there has been a decline in international commodity prices and a fall in motor vehicle exports due to prolonged shut downs of production caused by labour disputes.

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Source:- Inetbridge, ML

All of the above creates the second deficit in the balance of payments current account deficit. The above graphic also draws much adverse attention of the international rating agencies.

During the good times pre-2009, South Africa received favourable upgrades in long-term foreign currency sovereign credit ratings to BBB status. In October 2012 this was lowered to BBB status. The danger that currently exists is that ‘ two further downgrades will reduce South Africa rating to Junk status.’ This would prohibit many international investors from holding South Africa investments, leading to a massive exit of foreign investment and a resultant currency crisis.

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Souce:- Inetbridge, ML

Despite all of the above the Rand has been remarkably resilient in containing losses against the major currencies during 2013. But this cannot be taken for granted.

The privileged South African perspective of the MTPS

In short, the privileged South African is looking to the MTPS to provide sound economic policy that will lead to

  • Increased growth rates,
  • Containing the national deficit to acceptable proportions,
  • Effective and efficient government expenditure,
  • Comfort for the foreign investor that all is well in spite of elections in 2014‚ the rand volatile and South Africa’s sovereign rating at risk of a further downgrade by the rating agencies.

Many are looking for concrete evidence that National Treasury is actively supporting the objectives of the National Development Plan.

The under–privileged South African perspective of the MTPS

In short, the under-privileged South African has waited far too long for promised accelerated delivery. The ideals of sound economic policy can be of little comfort.

Situation critical is the stance of COSATU, the key pillar of the tri-partite alliance that underpins the ANC government. COSATU has openly critiscised the NDP.

With elections looming in 2014 Pravin Gordhan has to find the delicate balance between

  •  Sustainable economic policy acceptable to the international community and the minority that is the privileged South Africans, and
  • a politically acceptable economic policy that funds delivery to the majority of under-privileged South Africans.

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