Nene: No (more) tax hikes – maybe

Minister of Finance Nhlanhla Nene during his Budget Speech Address in the National Assembly in parliament,Cape town. February 25, 2015.
Minister of Finance Nhlanhla Nene during his Budget Speech Address in the National Assembly in parliament,Cape town. February 25, 2015.
Author: MARIAM ISA –

Finance Minister Nhlanhla Nene insists that further tax hikes are not inevitable in the next few years – despite a pressing need to raise extra revenue to finance new policy goals, and control budget deficits in the face of lacklustre economic growth.

Nene unveiled the first income-tax increases in nearly two decades in his maiden budget on Wednesday, which flagged the financial implications of plans to introduce national health insurance, while warning that “permanent spending increases” would be required that could not be funded from existing revenue streams.

“South Africans need to consider and debate the adjustments required to create room for these progressive spending policies,” Nene’s budget review said.

This reinforced fears that South Africans would be hit by a series of new tax hikes, beyond the increase in income tax imposed by Nene on people earning more than R181900 a year.

But, in an interview with Business Times, Nene said further tax hikes were not a “foregone conclusion”.

“The most elegant way of raising revenue is to grow the economy. It is for that reason that we were moderate in our tax increases, so that we do not stifle the economy – just finding the balance between that was a difficult task,” he said.

Cracking down on tax evasion and making the system more effective would help close the gap, while new measures to promote small business could “contribute tremendously to growing the cake”, he said, alongside new plans to expand industry.

Although personal income taxes were increased by one percentage point to 41% for people earning more than R181900 a year, the inflation-linked adjustments to tax brackets, rebates, and medical-scheme contributions meant it would only actually kick in for people earning above R450000 a year.

This meant that medical credits and fiscal drag relief (to compensate for people being pushed into a higher tax bracket because of inflation) would offset the income tax increase, which would otherwise have generated R9.42-billion for government coffers.

Nene also eased the strain on middle-income households by scrapping transfer duties for properties worth less than R750000, but he smacked the rich hard by hiking the rate on properties above R2.25-million to 11% – providing a meagre R100-million to official coffers.

There was extra tax relief in the form of a one-year reduction in contributions to the Unemployment Insurance Fund, which has an accumulated surplus of more than R90-billion.

Small business also received a big boost with a decision to eliminate tax on companies which make less than R335000 per year, while the maximum rate for those with higher turnover was halved to 3% from 6%.

In fact, the only real sources of new revenue for the Treasury was a 30.5c increase in the general fuel levy – which was expected – and the usual higher “sin” taxes for tobacco products and alcoholic beverages. These two higher taxes would bring in an extra R8.325-billion.

But consumers were also saddled with a 50c increase in the levy on fuel imposed for the cash-strapped Road Accident Fund, which has an unfunded liability of R98-billion.

This money will not form part of budget revenue but, according to Barclays economist Peter Worthington, the combined levies will boost the existing petrol price by 7.4% and lead to a 0.4 percentage point increase in inflation. This will remove the benefits to consumers of the plunge in oil prices seen over the past few months, which has triggered sharp falls in domestic petrol prices.

Nene also announced plans to “adjust” monthly ceilings for the controversial e-toll fees for Gauteng’s roads, which have been widely ignored by motorists who have simply refused to pay. But this plan exacerbates the financial woes of the South African National Roads Agency.

The government would also make a contribution to the cost of driving on the tolled roads, but this did not indicate a reversal of the “user pays” principle – it would simply help people who found it difficult to pay their bills and thus encourage compliance, Nene said.

He added that any future decisions on tax policy would continue to be informed by the Davis tax committee, set up in 2013, which would still not be concluded by the end of this year.

In particular, the committee is looking at VAT, which stands at 14% – low by international standards. The budget review said the committee had noted that there was “some scope” to increase taxes on capital income and marginal personal income tax rates.

Nene said it would also recommend further steps to boost small business.

The budget proposed a “temporary” increase in the electricity levy, which would take it to 5.5c/kWh from 3.5c/kWh at present. This could be removed when power constraints ease – which is unlikely for several years – and after a carbon tax was introduced in 2016.