Death and Taxes


Currently South Africa is running at a budget deficit of around 4% of GDP. Government debt stands at 46% of GDP and continues to grow. Our growth rate is sluggish at a projected 2.2% which is far below the 5% necessary to balance the budget. Our national ratings are hovering dangerously close to junk status. Somehow Finance Minister Nhlanhla Nene has to present a budget that shrinks the deficit, pays down the national debt and still maintains the funding necessary to implement the National Development Plan. Stressful! No wonder the last three Finance Ministers have been bald!

The taxman commeth!

At the mini-budget in October last year Minister Nene proposed R22 billion fiscal tightening for the coming financial year. In his view this would be achieved by “raising revenues and cutting expenditure”. Given the government’s track record on the latter we’d have to believe that this fiscal tightening will rely heavily on revenue. And by “revenue” he mostly means taxes.

There will very likely be the usual, almost traditional, increase to sin taxes (alcohol and cigarettes) and, thanks to low oil prices, a small increase to the fuel levy. According to Barclay’s these increases will also be joined by increases to capital gains, dividend and estate taxes. Also likely to see a rise in their income taxes will be the middle and top income earners.

The problem with increases to taxes like the ones mentioned above is that they take money out of the pocket of that most active group of consumers: the middle class. This engine of growth is already misfiring thanks to consumer debt and the added pressure of taxes might cause more problems than they solve. Truly the role of Finance Minister is an unenviable position.

Another interesting option, suggested as likely by a minority of analysts, is to increase VAT from the current level of 14% to 15%. This might spread the tax burden better and would likely provide more than enough “revenue”. But it is unlikely to occur thanks to politics: such an increase would hit the pockets of the poor, who make up the majority of voters, right before the 2016 local elections.

What does this all mean for home loans?

As I pointed an increase to taxes will mean less money spend on servicing debt. This means that the home loan amount you might qualify for will be lower, if you can qualify at all.

Looking at the longer term if the plans laid out in the speech fail to bring about the desired reduction in deficit we might see South Africa reduced to a junk status. This means that many investors will be forced to withdraw their capital (pensions and some other types of investment platforms cannot invest in junk status bonds) which will be disastrous for growth prospects. It will also increase the cost of lending by government which would further increase the deficit and the national debt. These dire events would also likely make local banks risk averse and we would likely see home finance dry up again like it did in 2009.

But don’t worry! We aren’t there quite yet and even if the Minister gives a dismal performance tomorrow (no pressure!) there will still be opportunities to mitigate the worst consequences.

Waste is the enemy of growth

In the end though trying to predict what will be in the speech (and really the speech itself) is entirely pointless thanks to that fact that the government is seemingly incapable of cutting wasteful expenditure. Whether through incompetence or corruption (often both) wasteful expenditure is the real enemy of growth and balancing the budget. And while Minister Nene might talk the talk, as all his predecessors have done, this will mean nothing without a government that walks the walk.

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