Almost on the eve of the Medium-Term Budget Policy Statement, or mini-budget, South Africa gets a new Minister of Finance after Nhlanhla Nene offers his resignation.
His successor, Tito Mboweni, is no stranger to the financial world. He was the first labour minister in our fledgling democracy, he succeeded Chris Stalls as the Governor of the Reserve Bank and served in that position for 10 years.
He has been in the private sector for many years, serving on the boards of private companies. He will have a clear understanding of the state of the economy, says Ettiene Retief, Chairman of the National Tax and SARS Committee at the South African Institute of Professional Accountants.
The road ahead
“It is evident that international markets have confidence in the appointment made by President Cyril Ramaphosa...Although the obvious vote of confidence on this appointment is welcomed, that momentum can easily be lost,” says Retief.
The question many commentators and taxpayers have is whether he will forge ahead with the policy statement that National Treasury officials have been preparing, or whether he will take this opportunity to announce drastic changes.
He is going to present his first mini-budget on 24 October. In February the expected shortfall for 2017-18 was R48.2bn. In the meantime, the economy has shrunk, and is in the fold of a technical recession.
South Africans have experienced tax increases on almost all fronts. The personal income tax rate has been increased to 41%, another band at 45% has been added and the Value Added Tax rate was increased to 15% in the February budget.
South Africans have also felt the pinch of increases in the rates of dividend withholding tax and capital gains tax and skyrocketing fuel prices. “We have already noticed that the tax collections are not mirroring the tax increases introduced in the last few years,” says Retief.
This cannot only be attributed to tax avoidance or tax evasion; the economic slowdown also plays a major role. Less people are employed, meaning less income tax, high worth net individuals are emigrating taking their wealth with them, and there has been a tangible slowdown in consumer spending.
Taxpayers desperately seek stability. They want to hear that government is taking control of our economy. Ratings agencies are keeping a keen eye on what is now being said and done. They too want to see and hear that economic stability is in sight.
“We want clarity on how government is going to deal with the revenue shortfall, how it is going to bring an end to the mismanagement and financial chaos at state owned enterprises and we want greater transparency on our increased reliance on expensive foreign debt to finance government expenses.”
South Africa needs answers about future electricity generation, the cost of electricity and how government’s plans will impact the economy. South Africans certainly do not want to hear that tax rates will again have to be raised to pay for the mistakes of the past.
“Although some tax experts expect a further VAT increase, we believe it to be unlikely at this stage, as it would impact the poor too significantly. And considering the negative reaction following the previous announcement that VAT will increase,” Retief notes.
Mboweni has been a proponent of a wealth tax in the past, but it is still early days to know whether he still holds that view.
The first major appearance of a new minister of finance is an important test for international and local confidence and whether the investors and financial markets trust what he says.
President Ramaphosa has stated the importance of restoring public trust in government. South Africans want to have confidence that their government is in control and doing the right things, even if it takes longer.
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