8 expected outcomes from the Medium Term Budget Policy Statement

Ferdie Schneider, National Head of Tax at BDO South Africa

In February 2015 SA's economic growth was forecasted at about 2.5% over the next 3 fiscal years. The IMF downgraded SA's growth forecast to 1.4% for 2015, 1.3% for 2016 and 2.0% in 2017. A downgraded GDP growth forecast will impact revenue collection and place more emphasis on lowering expenditure and increasing taxes.

However, SA will most likely maintain its investment rating.

Based on this and a few other variables, these are my suggested eight outcomes from the MTBS:

1. Tax increases (in February 2016) - likely to be personal income tax and Estate Duty
   
2. Investment rating to remain unchanged
   
3. Government investment attraction mechanisms
   
4. Further revision of growth forecasts
   
5. Further curtailing of non-interest government expenditure (relates to anything that doesn't result in profit - i.e. wasteful spending like entertainment, extreme wages etc)
   
6. Increased social spending
   
7. Upward revision of debt servicing costs
   
8. Announcements on the management and performance of state-owned enterprises.
   

These expected changes are as a result of a combination of variables added to a downgraded GDP growth forecast:

• We could see a much higher government wage over the period of the Medium Term Expenditure Framework (MTEF) than projected in February 2015. The average inflation rate for 2015 of 4.38% (compared to 6.13% in 2014) has mostly not met monthly targets and economists expect inflation to increase to the mid-5% range next year.
  
• The financial state of SA's state-owned enterprises could continue to be a problem with the latest Rand/Dollar exchange rate hovering at around R13.32 (compared to R11.08 in 2014) which is about 20% higher year-on-year. Lower natural resource prices severely impacts SA but is at least countered to some extent by a weaker exchange rate for exports.
  
• Corporate tax revenues did not grow as expected, probably due to lower global and domestic growth and increasing input costs. This is likely to continue. However, personal income tax and VAT collections did not disappoint: personal income tax exceeded projections but may be impacted by low growth, while VAT collections matched projections, but will probably decline (relatively) if growth remains under pressure.
  
• Fuel levies exceeded projections but could be ascribed to the 30.5c/l increase in the fuel levy and the 50c/l increase in the Road Accident Fund (RAF) levy earlier this year.
  
• The MTBPS may refer briefly to the Davis Tax Commission (DTC) work on Transfer Pricing, Estate Duty, VAT and mining taxation. Although a VAT increase could boost tax revenues in the most efficient way (estimated at R15 billion for every 1% VAT increase), the political agenda and a deterioration in economic outlook may act against a VAT increase. Although increases in Estate Duty will not generate any significant revenues, it may be considered politically astute.
  
• Compared to an increase in the VAT rate, an increase in Personal Income Tax (at higher income levels) will also not generate strong revenues, but may be an option that government would consider.