South Africa’s Finance Minister Pravin Gordhan delivered his Budget Speech on the 22nd of February.
His speech has been widely described as rather balanced and tight considering the less than zero economic growth and government debt levels. So what are some of the critics of the Minister’s speech in a nutshell?
1) Well, the highlight of the speech was definitely the increase of tax of the last income bracket to 45%. The global average highest income tax bracket is 33% so 45% is quite radical. On paper, as a redistributive measure, this tax would be great if our government’s implementation institutions were strong. Instead, we have a national treasury that is overly competent which does well with collecting and planning tax money but gives funds to some government programmes that are not doing any justice to transform and help small businesses.
2) The Finance Minister’s budget speech also did not even attempt to at least share some of the burden of this economic transformation, development and growth agenda across most South Africans as a gesture of unity and mutual interest of South Africans in seeing through the economic transformation agenda. We all have to play a part and they can be no spectators if we are going to realise this agenda. To be able to execute this, the Minister would have rather went the VAT route, even if it’s a 0.5 increase and add a few more tax exempt goods (including textbooks and other foodstuffs) from the already existing list for the poor citizen’s sake.
3) Cut wasteful Expenditure and Corruption that took about 30bn of the taxpayer’s money. Things have to get worse before they become better, and that’s what our government is afraid of, we need drastic and unpopular action, wage bill cuts, cut unnecessary travel, vehicle and excessive housing allowances, all these expenditures that are deemed petty actually add up to millions of Rands.
4) Parastatals like (SAA, PetrolSA, Sanral, SA post office, SABC) are also fiscal-drainers as we always have to bail them out. Fin24 reported that in 2015 these state-owned companies managed to blow about R20.6bn and about R15.5bn in 2016 of taxpayer’s money. Am not saying they must become profit machines because that’s not their mandate, but making losses and massive inefficiency is not their mandate either. At best they must break-even.
5) The additional 5bn injected for Education is welcomed. However, Education interventions need not to only focus on tertiary education but all the way down to basic education. I disagree with youth wage subsidy because it’s just shifting the problem from inexperienced unemployed youth to 1year experienced unemployed youth. As much as skills development is important, the more urgent problem is the availability of the permanent jobs after the training. This will only happen if we grow the economy to accommodate the trained youth.
6) With dividend tax, the Minister makes a good argument for trying to reduce the gap between the individual income tax e.g (R200 000 – 26% tax payable) and dividends (R200 000 – now 20% tax payable), it’s still relatively cheaper to take dividends than a salary. However, the issue with the dividend and company tax has always been about the threshold. Minister Parvin says he was Pro-growth especially with SMEs but his speech breakdown says otherwise. The 20% dividends tax and the 25% corporate tax still kicks in too low at, R200 000 and R550 000 per annum subsequently. For me, his still taxing SMEs which arguably can still be regarded as a survivalist or just made it businesses. All these taxes come with administrative compliance burden to SMEs which sometimes ends up as a demotivating factor for these businesses. The Finance Minister is expecting much growth of about 1.3 % from these SMEs but to accomplish this will be a mission because as classical economists would put it, “if you want less of something you tax it and if you want more of it, you subsidise it”. The 3% corporate tax relief is somewhat good as this might simulate a few more jobs in the corporate sector, however, I just don’t see how a 3% company tax reduction can generate the 1.3% overall growth on its own. Am of the opinion that, Minister Parvin should have at least increased, all the SMEs related tax thresholds to give them a little breather. Dividends tax should start to kick in at R500 000 per annum, company tax at R1.5m per month, VAT registration requirement from R1m to at least 1.5m per annum companies. The VAT registration is the worst administration nightmare for SMEs and really hurts their cash flow as companies have to pay using the invoice system. It’s like paying for money they haven’t received. The Radical Economic transformation agenda is good but will require political will and leaders that will lead and inspires confidence to South Africans for them to believe it’s working.
Mikovhe Tshivhase (NMMU Masters of Economics Student)
079 388 4421