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'The government headcount has plateaued at around 1.32-million staff‚ but wage growth has been robust'

Notes from #Budget2017‚ by Lesiba Mothata‚ Chief Economist at Investment Solutions

The focus of the 2017/18 national budget was to raise R28 billion by increasing taxes. This has resulted in the tax burden increasing from 26% to 26.7% of gross domestic product (GDP)‚ which is still in the middle range relative to similar countries.

 The government has adhered to its spending ceiling since the ceiling was established in 2012‚ which has earned it credibility with investors and ratings agencies.

 Personal income tax

 A new top personal income tax bracket of 45% for individuals earning salaries above R1.5 million a year was introduced. The National Treasury indicated there are about 100 000 tax payers in this bracket. Previously‚ the top personal income tax bracket was 41% — set at an annual salary of R701 301. The tax-free threshold has increased from R75 000 to R75 750.

To plug the loophole that may arise when the top marginal tax rate is increased — such as shifting income into different alternative structures to avoid a higher tax rate — dividend withholding taxes and taxes on trusts have also been increased (see Table 1). In addition‚ withholding tax on immovable property sales by foreigners is set to increase from 5% to 7.5% for individuals‚ 7.5% to 10% for companies and 10% to 15% for trusts.

Value added tax (VAT)

The VAT rate remains unchanged at 14%‚ but the base will be increased going forward. Specifically‚ there is a plan to remove the zero-rating status on fuel. Electronic services‚ such as cloud computing and online services‚ will also be subjected to VAT.

Corporate tax

 There were no changes to the corporate tax rate of 28%‚ which is three percentage points higher than the 25% average for Organisation for Economic Co-operation and Development countries. However‚ tax incentives have been reviewed:

-Urban development zone of 2012

-Extended to 2022 to support training and skills development‚ especially scarce skills such as artisans;

-Extension of the employment tax incentive to 2019 (50 000 firms have used the programme).

 All other taxes

The National Treasury is charging ahead with its proposed tax on sugary beverages‚ which will be implemented once approved by Parliament and signed by the President. The fuel levy was increased by 30c/litre and the Road Accident Fund levy by R9c/litre.

 There is a plan to discontinue the use of interest-free loans to avoid estate duty. On residential property‚ the duty-free threshold has increased from R750 000 to R900 000.

Fiscal policy outlook

Despite South Africa being in the midst of the worst economic downturn in the business cycle since 1994‚ the main budget primary deficit narrowed over the past four years. The primary deficit — which is the difference between total revenue and non-interest expenditure — is expected to have a surplus in the medium term. When government revenue exceeds non-interest expenditure there is a surplus.

The prospect of a surplus on the primary balance has made a positive contribution to stabilising the net-debt-to-GDP ratio at around 48% in the next five years. Since debt became a focal point for investors and rating agencies three years ago‚ the National Treasury has been able to demonstrate its commitment to curbing borrowing‚ which would have easily raised questions of debt sustainability.

 Public wage bill

The government headcount has plateaued at around 1.32-million staff‚ but wage growth has been robust.

Salaries of public servants nearly doubled between 2008 and 2016 with a 1.8 percentage point increase above consumer price index (CPI) inflation. According to data from Statistics South Africa‚ relative to the private sector‚ average monthly earnings (including bonuses and overtime payments) have been growing at around 4.4% year-on-year. Although adding staff has been curtailed in the public sector‚ wage growth remain spectacular compared to the private sector.

 The upcoming wage negotiations later this year‚ if concluded at similar agreements to previous years‚ not reduced wage settlements‚ could add further risk to the fiscal outlook.

State-owned enterprises and guarantees

 The power purchase agreements Eskom has with independent power producers (IPPs) has added to fiscal risk‚ as financial outcomes at the power utility would determine whether contingent liabilities become real liabilities. As it is‚ the lion’s share of the government’s contingent liabilities through state guarantees is related to Eskom. The commitment to purchase up to R200 billion in renewable energy from IPPs has the added to fiscal risk. Should Eskom’s financial position deteriorate‚ huge strain will be felt directly from the fiscus.

#Fees must fall

Post-school education and training remains the second fastest component of government expenditure (9.2%) after interest payments on debt (10.5%). The largest addition in the budget relates to higher education — totalling R16.1 billion over the medium term. This allocation is funded from within the budget‚ without additional borrowing. In terms of other funding options‚ the National Treasury’s work suggests there is no merit in introducing a graduate tax to fund higher education as it will not raise enough money. The tax could generate only R3 billion a year‚ which is 5% of the R60 billion universities spent in 2015.

Bottom line

The planned revenue raising goal generated from tax hikes‚ which was tabulated in the October 2016 medium-term budget policy framework statement‚ has been achieved. Consolidation on expenditure continues‚ although its growth rate at 7.9% remains well above the expected 1.8% GDP growth over the forecast horizon. Budget 2017 was silent on how GDP is going to be lifted in South Africa and little attention was paid to structural reforms. To this end‚ the success of the plans put forward in the budget depend heavily on developments in the global and domestic business cycles.

 

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