Budget fails to change the status quo

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 13 February 2009

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The government has once again missed the opportunity to make those strategic changes necessary to set the South African economy on a long-term sustainable growth trajectory – incentives for foreign direct investment (FDI), allowances to increase the savings rate of South Africans, and accountability by government to improve efficiency of how it spends taxpayers' money.

Kemp Munnik, tax director at BDO Spencer Steward, said the Budget is a predictable document, but fails to change the status quo or address the entrenched weaknesses of the economy.

The single biggest gripe about tax, he said, is that it is not perceived as value for money. Other countries have a higher personal tax rate than South Africa, but their citizens do not have to pay for health, education or often retirement.

“The cost of education, health and defence are effectively double what they were at the end of the Mandela administration, with little noticeable improvement in those sectors. The focus should be on effecting efficiency from what money they have, before asking taxpayers for more,” said Munnik.

In particular, the huge amount spent on defence was inexcusable. Munnik describes the latest Budget as mere tinkering.

“For lower income individuals, Finance Minister Trevor Manuel has with one hand given substantial tax concessions, but with the other hand takes it right back with substantial increases in levies on fuel, alcohol and tobacco. In reality, their financial position is left unchanged.”

If the purpose of such levies is to be ‘sin taxes', then it has demonstrably failed, as the number of cigarettes smoked in South Africa is almost identical to what it was eight years ago.

“Two other endemic problems have been ignored. As a developing country, South Africa needs to attract large volumes of FDI and to accomplish this requires incentives. Though such an amendment wasn't anticipated, I nonetheless feel it is a missed opportunity at this time when capital flows might be expected to resume during this year, that South Africa has not put in its bid to capture at least some of these flows.

“An incentive at this time might have made South Africa more attractive,” said Munnik. He said Manuel could have considered incentives for specific industries, especially in infrastructure development, electricity generation, information technology and mining, which currently have to import large numbers of skilled workers.

“A tax break linked to local skills development would have been welcome, and cost-effective,” he said.

Even more tragic, he says, is that the perennial problem of getting South Africans to save more has again not been addressed.

“The government says it wants South Africans to save more, but high inflation and tax on interest create an environment conducive to spending rather than saving.

“It takes years to inculcate a culture of saving, so not a moment is to be lost. The government should have considered increasing the tax-free portion of interest, or creating incentives to save for retirement, which would ultimately reduce the liability of the state to support old-age pensioners.”

Its short-term approach, said Munnik, highlights the weakness of the Budget process, with an over-emphasis on raising additional revenue rather than greater control over expenditure.

“Huge inefficiency and lack of accountability is built into government expenditure – and this is worsening by the day rather than getting better. For instance, part of the fuel levy is destined for municipal coffers to replace their lost RSC levy. That's a mistake as most local authorities utterly lack the capacity to manage their finances.

“I would suggest that no new money be allocated to municipalities until they acquire the skills and capacity to manage their finances, as demonstrated by a clean audit report – from the auditor general,” concluded Munnik.

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 13 February 2009