Matthew Lester: Tax alert – big news coming in next week’s Mini Budget

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Matthew Lester: Tax alert – big news coming in next week’s Mini Budget
Matthew Lester: Tax alert – big news coming in next week’s Mini Budget

Some say the news event of October will again be Oscar Pistorius. After all he has pushed the last two February national budget speeches right out of the media.

This is a great pity. The state of the economy is as bad as I have ever known. Yet nobody seems to care. At social occasions it is difficult to engage anyone in any form of intellectual debate about anything, let alone the economy. It is getting as boring as watching Big Brother.

Pay attention next Wednesday, 22 October 2014. I reckon South Africa’s new finance minister, Nhlanhla Nene, may bite the bullet and bring RSA closer towards reality.

South Africa has a habit of changing finance ministers at the worst possible time. Pravin Gordhan took over from Trevor Manuel right at the bottom of the 2009 dip. He rode out four years of bad times. And now, when things look as bad as 2009, Nene takes over. Fortunately he is extremely competent.

In 2009 the economist nerds told us that all would be fine within two years. The dip would be a ‘V” of quick in and quick out. They forecast that the 2008 crisis would be ‘just a blip’ in years to come.

By 2011 the ‘V’ had changed to a ‘W’ and it would take a while longer. And today nobody is prepared to put their nuts on a block as to when a 4% growth rate will ever return. They call it ‘the bathtub.’ But I cannot see the plug or the end of it.

Back in the glory days when Maria Ramos was director general at National Treasury and Trevor Manuel was minister of finance they developed a tax strategy that relied on three major taxes – Personal Income Tax ‘PIT’, Corporate Tax ‘CIT” and VAT – comprising about 85% of total tax collections. All the rest made up the remainder.

The strategy served RSA very well from 2000 to 2008. Fueled by plus 4% growth rates and a range of new tax laws, primarily targeted at individual taxpayers, tax collections grew at a nominal 12% per annum. An invitation to the celebrations at Trevor Manuel’s National Budget Speech was a bigger ticket in social circles than a pissup at the J&B Met.

The weakness in RSA’s strategy is that most developed countries have social security tax “SST”. In most of the OECD PIT plus SST =50% of tax collections. RSA tries to go it on PIT at 35% with no SST. Fair enough because we don’t have much social security for the employed South African.

But when CIT falters due to problems in the economy we land up firing on two cylinders out of three. Not the three out of four if we had SST. And the tax burden falls on the individual taxpayer in the form of increased PIT and VAT.

So Pravin Gordhan caught the biggest hospital pass from Trevor Manuel since Naas Botha graced our rugby fields.

PG is a tough task master and the best manager of people I have ever had the privilege to meet. He is also a compassionate man committed to the ideals of the struggle that protect the poor. So he soldiers on and doesn’t cash in with the private sector as others do.  His compassion and commitment to the poor throughout his term as minister of finance meant he hung on in the hope that growth rates would return and the Ramos/Manuel game plan would work again.

Nobody is talking 4% growth rates today. We have accumulated R1,2 trillion in National debt since 2008. And if we carry on like this our sovereign debt rating is going one way – Junk.

In addition to all of this RSA has adopted the National Development Plan. And the NDP is driven by growth rates we don’t have.

There will be no change in tax rates on 22 October 2014. But we could see indications on the following questions that are of critical importance for 2015.

  1  Is RSA on track for tax collections and budgeted deficit for the 2014/15 year? SARS must collect R1 trillion. How are we progressing?
  2  What is the call on growth rate recovery for the next 3 years? The current national budget predicts a recovery that must be questionable.
  3  Are we going to carry on adding to the National Deficit or are we seriously finally going to curb government expenditure?
  4 How are we going to squeeze more out of  the existing tax system or are we finally facing VAT and PIT increases in 2015?

This is critical stuff for all of us. So sign up on the biznews mailing list and I will give you my assessment of the occasion on the occasion from my own little “lock up”.

Article by : Mathew Lester

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