2009 Budget

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 9 March 2009

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Overview

Last year, for the first time since 2004, tax revenues failed to meet expectations, falling R14,4 billion short of the R642,1 billion that was budgeted for a year ago. This was due to lower domestic consumption (with lower VAT revenues) and a dramatic fall in commodity prices and slowing economic growth. On a positive note, the increase in revenue SARS achieved last year is something virtually no other tax authority accomplished during the difficult economic times in 2008. The other good news was that the country's R787 billion infrastructure spending programme remains on track.

South Africa is going to spend 16% more this coming year than last, with the Budget deficit set to expand to 3,9% of gross domestic product (GDP) this year. Coming after three years of Budget surpluses, the interest bill will cost taxpayers only R55 billion, compared to an interest bill of R48 billion in 2000 by any calculation, an affordable cost. This year's R74 billion deficit in any other year would have been catastrophic, but this year barely warrants mention in what has become the Year of Deficits around the world.

South Africa's debt-to-GDP ratio still stands at 25% of GDP, down from nearly 50% more than a decade ago. This makes our international exposure more prudent than almost any other country.

Government Expenditure Leaves Plenty Scope for Quality Checks

Buried in the consolidated government expenditure is a huge amount of waste. The consolidated cost of government health expenditure is set to rise to R86,9 billion in 2009/10, almost double in real terms what it was eight years ago, without having addressed the real problem of healthcare in the country.

The cost of education (R140,4 billion) is the largest single expense in the Budget. It too is about double the level in 2000 again, for no perceptible improvement in standards. But government has thrown down the gauntlet on quality of service delivery: for instance, after years of resistance government finally looks set to reintroduce a school's inspectorate to evaluate and enhance school and teacher performance.

However, the single biggest waste in expenditure surely has to be on defence, where this year's budgeted cost of R109 billion compares in real terms to R59 billion in 2000: where is the external threat?

Corporate Tax Environment Remains Unchanged

Although there were no concessions in the corporate tax rate, business had over the past few years been the major beneficiaries of a reducing tax rate: the corporate tax rate had first been dropped from 30% to 29%; Regional Services Council levies had been abolished; Secondary Tax on Companies was dropped last year, but now rolled over for another year; and last year the corporate tax rate was once again lowered from 29% to 28%, while the planned implementation of the mining royalties tax regime has been delayed a year. Although many feel the opportunity was lost to set incentives that would attract foreign direct investment (FDI) to South Africa, once such flows resume, most sighed with relief that there was at least no increase in the corporate tax rate.

Small Business Gets a Boost

The small business sector, along with the mining industry, was the big beneficiary of this year's budget.

For small and medium enterprises (SMEs), an increase was announced in the threshold of VAT payments, from R300 000 to R1 million. Many small businesses do not turnover more than R1 million, and they will therefore no longer have to register as VAT payers or pay the 14% VAT. It will lift a heavy administrative burden from small business.

The Budget also supports a range of industrial support measures, totaling about R17 billion. A small amount of about R3 billion has been set aside for the promotion of small business, tied to job-creating public works. Small business will be eligible for credits if they can demonstrate that projects will create jobs. The stimulus package for the poor, consisting of extending the tax exemption to annual income levels of R54 000 per year, as well as the increases in social grants, various job creation and poverty relief measures, will indirectly help small business by putting billions of rands into the hands of their potential customers. Apart from small business, it will benefit traditional retailers aimed at the lower end of the income spectrum.

The tax relief for the mining sector was aimed at limiting job losses in the embattled industry.

Personal Tax Relief Favours Lower Income Earners

Tax concessions were announced for small business, and big business has been the major beneficiary in previous budgets. Where does this leave the individual taxpayer? For the past two years, tax benefits have largely been paid for by individuals. Once again this year, salary increases have outstripped inflation in every income group and Manuel has taken advantage of this to let fiscal drag add substantially to revenue. Personal tax concessions have been limited to the bottom end of the income scale, while the top end has seen its allowance reduced.

To add insult to injury, the mileage allowance is to be finally phased out as at 2011. More than 500 000 taxpayers claim travel allowances, one of only two such fringe benefits still allowed them. The other fringe benefit is medical scheme contributions, where there was a reshuffling of the monthly monetary caps. Replacement of the medical scheme contribution deduction with a non-refundable tax credit is under consideration.

Budget Downfalls

There are no incentives for foreign direct investment (FDI), no allowances to increase the savings rate of South Africans, and no accountability has been established for government to improve efficiency of how it spends taxpayers' money.

Where tax concessions are given with one hand, such as to lower income earners, the other hand grabs it back through increases in levies on fuel, alcohol and tobacco. In reality, their financial position is left unchanged.

No incentives were put in place to stimulate increased saving. It takes years to inculcate a culture of saving, and not a moment should be lost. The government should have considered increasing the tax-free portion of interest, or creating incentives to save for retirement.

The massive inefficiency and lack of accountability of government is also not addressed.

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 9 March 2009