Cape Town Finance Minister Pravin Gordhans 2017 Budget Speech was one that was drafted in difficult times amid revenue shortfalls, slow economic growth, increasing government debt and uncertainty about his tenure as political head of the National Treasury.
As was widely speculated, Gordhan announced a new personal income tax bracket for South Africans earning more than R1.5m who will be taxed at 45%, while providing limited relief for fiscal drag.
Gordhan did not raise the marginal tax rates for taxpayers in the 18% to 41% tax brackets, but provided very limited tax relief for this grouping.
In addition, he raised the withholding tax on dividends to 20% from the previous 15%. Capital gains tax, however, remained unchanged.
The tax hikes shouldnt have come as a surprise, though. In his medium-term budget policy statement delivered in October last year, Gordhan cautioned that something has got to give to fill the R28bn hole in the fiscal gap and that tax increases would be announced in the next annual budget review in light of the revenue shortfall the largest in eight years.
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In his speech, Gordhan said GDP growth is still expected to average 1.3% in 2017, increasing slightly to 2% over the medium term.
The projected growth rate however is not high enough to make a significant dent in unemployment, poverty and inequality, Gordhan said, and added that inclusive growth requires broad-based transformation to enable millions of black South Africans to generate income and raise per capita incomes across the board.
Although governments gross debt levels fell in the short term, the debt to GDP ratio is still high and is expected to peak just below 53% in 2018/19 before stabilising at 48.2% in 2020/21.
Government debt currently stands at R2.2tr, and debt service cost amounts to R169bn.
Gordhan pointed out that interest payments on debt is a rising share of expenditure and that the country has little choice but to stabilise debt so as to make sure future generations dont have to cough up for current expenses in the next decades to come.
An uncertain future
In addition to the limited fiscal space that allows for little maneuvering, Gordhan had to deliver the 2017 Budget Speech against the background of calls for his resignation (from the ANC Youth League and Womens League among others) and rumours that he could be replaced by former Eskom CEO Brian Molefe who is expected to be sworn in as a member of Parliament soon.
Gordhan, however, appeared to be unfazed by the political undercurrents and told journalists at a media briefing ahead of his speech that he serves at the pleasure of the president.
He made it clear though that National Treasury as an institution remains steadfast in serving the country and that he has executed his duties to the best of his abilities.