BUDGET 2018
- Budget 2018: Staying afloat in an ocean of debt
- Where to with the NHI and medical credits?
- Cryptocurrencies: Tax laws to be amended
- Educating our children Government weighs in
- SAICA Budget Summary – click here
Budget 2018: Staying afloat in an ocean of debt
‘There are no joys without mountains having been climbed. There are no joys without the nightmares that precede them and spring them into light’ – Ben Okri, A Way of Being Free, 1997
The words of Ben Okri quoted by then Minister of Finance Trevor Manual in presenting Budget Speech 2006 eerily felt like déjà vu when listening to Budget Speech 2018. The public discourse has been quite positive across the country as political leadership change in South Africa unfolded in the last week. Even in Parliament, the adversarial environment and scenes of violence were temporarily gone and discussion uncannily civil.
The Budget Review 2018 can be described as continuing the previous year’s theme of moderation; a lot less was presented than was feared, especially given the talk of ‘radical economic transformation’, though this equates more to the President’s explanation of the term on 27 June 2017. The Minister of Finance himself was clear: this is a tough but hopeful budget, aligning his message to that of the President’s State of the Nation Address of hope to the nation which is dearly needed.
However, as the euphoria dies down and we all get back to evaluating and doing what must be done to right Ship SA, questions start arising over whether the incoming political leadership not only have the capacity to fix enormous structural problems and align the very opposing economic dialogue, but whether they have received a poisoned chalice. Similar to 1994, when the incoming leadership had to face many challenges but too little resources, a dwindling economy and an over indebted state. As we ponder over these challenges, concerns also start rising that too much may be expected by the public, especially with a general election in just over 12 months. However, as the Minister says, this is a budget of hope; finding solutions and not being discouraged by the challenges but looking forward to the joy when we conquer them.
We can summarise the Minister’s speech in his own words:
‘It required us to make difficult but necessary trade-offs, important to ensure that this budget is a platform for renewal, inclusive growth and job creation. It directs spending to our most pressing national priorities: educating our youth, protecting the vulnerable and investing in enablers of inclusive growth. It moderates spending and raises the revenues required to contain the growth in national debt, whilst trying to minimize negative effects on growth.’
Much of the above resonate clearly from the SAICA Budget Summary click here and it was refreshing to see that the Davis Tax Committee recommendations have at least now been judiciously considered.
For the public the hope was always to be found in Government taking seriously the lack of accountability in state spending, especially for fruitless and wasteful expenditure. Tax morality was a big theme in this year’s budget and we have seen some dramatic proposals including given more powers to the Auditor-General to collect wasted money from public officials, denying SOEs tax deductions for such costs, and implementing a host of checks and balances as to how SARS operates. Taxpayers were not left out: tax practitioners will now face possible deregistration for non-compliance with the requirements, which may invariably include their own tax compliance.
The President and the Minister are rightfully preaching hope, however the words of Ben Okri quoted above resonate even more loudly now than ever before since 1994, and there are mountains and nightmares to conquer before we get to the joy. So, if all seems is seemingly on track, are there major concerns? The answer is yes, as the two main structural problems in our Budget remain without much insights being given how they will be addressed namely, state debt and staff costs.
STATE DEBT AND CONSUMER DEBT – BOILING THE FROG SLOWLY
We need to look at this holistically for both state and consumers as the debt of the latter has a direct impact on the state’s ability to collect taxes and moneys due. Furthermore, over-indebtedness by the state has severe consequences and as we have seen in the Irish Republic and Greece, will be enforced with severe adjustments to spending policy.
National state debt
Similar to the early and mid-2000s, concern of state debt was high on the agenda and much had been done in the preceding years to rein it in. The then Minister of Finance noted that debt in 1994 cost South Africa 24c for each rand and predicted that if the same fiscal policy was followed, by 2009 this would be down to 10c for each rand.
In 2001 a columnist in Personal Finance was so impressed with the government’s ability to control its finances that he had this to say:
‘The most important issue is that the ANC government, for it is the ANC’s Budget, not only Manuel’s, has stuck to a rigid regime of fiscal discipline. In other words, it has not borrowed and spent its way to popularity with any particular interest group.
‘The principles of running a country are not much different to running your home, namely, to use an old cliché, you have to cut your coat according to your cloth. If you borrow too much money, you will ultimately land up in trouble and you will have to make major sacrifices to get yourself back on the straight and narrow. Likewise with any government and its citizens.’
Though these fiscal principles sound as true today as they did then, the changes in the global economy in 2008 as well as the change in political leadership and fiscal prioritisation would unfortunately mean that this road less travelled would be no more. It was also not just the state. In 2015 the World Bank reported that South Africans are the most indebted people in the world, with 86% of people having debt compared to the global average only 40%. As a country and state we have taken the easy road and as a nation and state developed a bad habit of financing our wants and needs with other people’s money.
The Minister of Finance has acknowledged this concern and echoes the same sentiment in Budget 2018:
‘Debt service costs were also projected to rise, crowding out social spending.
‘We dare not borrow irresponsibly, leaving it to future generations to repay. Our fiscal interventions also demand greater efficiency in the use of funds across the public sector. Government recognises the need to shift spending away from consumption towards higher investment.’
These are wise words indeed and all should heed the warning. The question is whether we will be willing to climb the mountain or will continue to kick the can down the road as we have done, especially in the last five years. We need to understand why this debt nightmare is going to haunt us so we can bring hope to us all in conquering it. But we must not underestimate the enormity of the task that lies ahead.
Public debt is estimated to now increase from the current 53,3% to 56,2% of GDP and decline after 2023. It is unclear how this will be achieved and we will refrain from reaching the MTBPS 2017 estimate of over 60%. Real GDP growth is not estimated to reach anywhere near 3% in the medium term. The preceding five years grew by more than 10% so that if nothing else changes, why would the next five not do so as well? In 2017/2018 we borrowed R217 billion, R50 billion more than budgeted in 2017. Long gone are our plans for public debt levels below 50% and decreasing by 2019 as was estimated five years ago − and these amounts do not even include SOE guarantees realising.
Debt is driven by government funding its operational expenditure and its spending plans don’t seem to include reducing any time soon, reaching nearly R2 trillion by 2021. This has been exponential growth over especially the last 10 years.
The cost of this debt has also become astronomical and the Minister acknowledges that it is crowding out other spending areas.
By 2021, debt service costs are estimated to be R214 billion, which will be more than or nearly equal to what we intend to spend in 2020 on health (R206 billion), social protection (R207 billion), policing and defence (R221 billion) with even basic education (R273 billion) not that far ahead. This all assuming we don’t receive a local debt downgrade before then.
In addition to this, the state is also exposed to SOE debts through guarantees, and as we saw in 2017, this is becoming a lot more akin to debt than guarantees. In 2017/2018 these stood at R466 billion, and if only 10% or 20% of this realised, the state would be in serious financial difficulty.
Local government debt
Local government has suffered from the same lack of debt control with more than R100 billion in debt and debt instruments.
What makes this even more problematic for them, is that unlike the national debt book collected by SARS, the municipal debt book and unrecoverable debt is escalating daily, including debts from National Government.
Consumer debt
There is not much better news when it comes to consumers and taxpayers. Over and above the R101 billion owed to municipalities, the National Credit Regulator shocked parliament last year with the news that consumers owe formal lenders R1,6 trillion. Forty per cent of credit active persons have impaired records, but when taken as a percentage of persons in the formal employment sector, that figure balloons to over 60%.
Staff costs
Public sector wages have grown by 10,3% in the last five years and given the wages demands for 2019, do not seem to dissipate. This makes debt costs and wages the fastest growing expenses in the budget. Public sector wages of national and provincial government will be R630 billion by 2020.
To put this in context: if we continue with the same GDP growth that we currently have and maintain about a 27% tax/GDP ratio, staff costs at current rates will equal 100% of net revenue within the next 24 years (that is, 2042).
What is concerning is that Government seems to be budgeting CPI +1% for staff cost increases, although they have not been able to achieve this in the last decade.
IN CONCLUSION
It is clear that without drastic and radical intervention in our insatiable want for debt, the South African state and its consumers will soon find themselves facing the same nightmare as the Greeks in 2015. The lack of control over staff costs adds to the spiralling debt problem and we seem to be no closer to having a social contract with public sector organised labour.
The concerning thing about the Budget Review 2018 and its predecessors in the last few years has not been the level of debt and staff costs, but the deafening silence as to how to control and manage these.
Hope is a dangerous thing if use improperly but powerful if used correctly. The Minister may and should bring us hope as a country in steering the country financially on the right path − something this government has achieved before. However, we should not be deluded: keeping to the fiscal right path was not easy and without sacrifice, as many dreams were delayed, especially those of the poor. Merely staying afloat in an ocean of debt is just not good enough − we need to start swimming to shore and quickly. What the Minister and President made clear is that this time round, it will take a more concerted effort from everyone.
Where to with the NHI and medical credits?
The way forward with the National Health Insurance plan is starting to gain some momentum after the 2018/19 Budget speech in terms of a number of transitional arrangements although not as much as was originally anticipated in the run-up to the Budget
In its White Paper on the National Health Insurance plan (NHI), the Department of Health described it as ‘a health financing system that is designed to pool funds to provide universal access to quality, affordable personal health services for all South Africans based on their health needs, irrespective of their socio-economic status’.
The intention behind the NHI is to provide free access to personal health care service at the point of service for all South Africans and legal residents. The primary long-term objective is to provide access to health care based on individual need instead of financial ability, and to cover unplanned health events for everyone.
The idea is that the NHI Fund will operate as a single publicly financed and administered fund and envisages all South Africans making compulsory contributions to the fund based on their ability to pay. The NHI Fund would therefore promote cross-subsidisation on a bigger scale than is currently the case with individual medical aid schemes.
In the meantime, while the plans for implementing the NHI are being streamlined, taxpayers have for the past few years been given some benefit in the form of medical tax credits, which have been the topic of much controversy. The medical tax credits are a form of rebate and has provided some tax relief for defraying expensive medical costs. It was always known that this would be an interim measure until such time that the NHI is fully operational, but there have even been talks of a complete scrapping of this rebate in the months leading up to the Budget. Alas, there were no such drastic measures, which is somewhat of a relief for the moment.
It was noted in the Budget, in relation to these medical tax credits, that some individuals are excessively benefiting from the medical schemes contribution rebate, specifically where multiple taxpayers contribute toward the medical scheme or expenses of another person. The example used is where adult children jointly contribute to their elderly mother’s medical scheme and where each contributor currently enjoys a full rebate, although the joint cost is for a single beneficiary. The Budget proposes that in such cases the medical tax credit should also be apportioned between the various contributors.
The monthly medical scheme fees tax credit will, from 1 March 2018, be slightly increased from R303 to R310 per month for the first two beneficiaries. For each additional beneficiary, the increase will be from R204 to R209. It is important to note that these increases are by design below inflation, the purpose being that Government has earmarked the additional revenue that will flow from the below inflationary rebate to contribute towards funding of the NHI. The expected impact is additional revenue of R700 million in 2018/19, R640 million in 2019/20 and R586 million in 2020/21, and these benefits are therefore projected over a three-year period. While this proposal is in line with the proposals made in the NHI White Paper released in June 2017, it seems that this will not have a significant impact on the NHI cost, given that the 2025 estimated cost is in the region of R256 billion. In the 2017/18 Budget, the then Minister of Finance, Pravin Gordhan, set aside R5,2 billion for the NHI fund, which although much more than this year, is still not significant considering the overall funding need.
The NHI is therefore still very much a ‘work in progress’ and significantly more work needs to be done before it goes live.
AUTHOR l Christel van Wyk is SAICA Project Director: Tax
CryptocurrenciesTax laws to be amended
Public awareness of cryptocurrencies has increased significantly over the past couple of months, perhaps because of substantial increases (and sometimes implosion) in the values of cryptocurrencies such as Bitcoin. More fundamentally, it could reflect the fact that consumers and businesses see potential for such digital currencies and the technology to be useful in their daily lives and operations. Some payment mechanisms used by South African retailers already enable their customers to pay using cryptocurrencies.
Despite many sceptics, cryptocurrencies could have a far-reaching impact on the way in which businesses operate if there is widespread adoption. This would in turn affect the way that taxes are imposed and collected. The National Treasury acknowledged this fact with the announcement in the Budget Review 2018 that income tax and VAT legislation will be amended to address issues arising from cryptocurrency transactions. Annexure C of the Budget Review hints at some of the issues that will be addressed.
From an income tax perspective, both the receipt of cryptocurrencies and transfer thereof as method of payment pose uncertainties. As with any other form of payment received, the recipient should account for, and be taxed on, cryptocurrencies received as consideration in a transaction. Given the current volatility of the prices of most cryptocurrencies, the value of the units of cryptocurrency received today may be significantly more, or less, tomorrow. The issue as to how such receipts with such volatile values should be taxed is raised in the Budget Review. On the other hand, payers who use cryptocurrencies to make payments could realise gains (or losses) on the cryptocurrencies exchanged. If exchanged for goods or services, they will become liable for tax without obtaining cash from the transaction to pay such tax. Revenue services in other countries face similar challenges though ring-fencing cryptocurrency losses seems high on the agenda as a concern, given the spectacular price implosion of Bitcoin since December 2017. In addition, the proposals would ostensibly also have to address transaction and mining fees, given that the former also forms part of the latter for cryptocurrencies and that ‘new coins’ are issued as part payment.
Transactions involving cryptocurrencies are also problematic from a VAT perspective. Unless a cryptocurrency is classified as and treated similarly to money for VAT purposes, the risk exists that the supplier of the cryptocurrency (customer) may be liable to charge VAT on the cryptocurrency supplied. If this happens, the system through which VAT is currently collected by SARS from suppliers could become one where, in some instances, SARS would have to collect VAT on a transaction from the customer rather than the supplier. Administrative difficulties that the supply of cryptocurrencies can cause was identified as an area that requires attention.
Although not explicitly addressed in the budget, transactions undertaken by exchanging cryptocurrencies, often on unregulated platforms, are likely to present numerous administrative challenges to SARS. Foremost of these would be detection of the transactions which invariably may result in another compelled disclosure regime for banks and taxpayers should the relevant cryptocurrency not have a data trail. The announcements in the Budget Review 2018 show that despite the obstacles it may face, SARS is intent on collecting tax on these transactions and stem possible tax evasion through the use of these technologies.
AUTHOR l Pieter van der Zwan is a member of the SAICA National Tax Committee and an associate professor at North-West University
Educating our children Government weighs in
The way forward with the National Health Insurance plan is starting to gain some momentum after the 2018/19 Budget speech in terms of a number of transitional arrangements although not as much as was originally anticipated in the run-up to the Budget
Minister of Finance Malusi Gigaba’s maiden Budget Speech delivered on 21 February 2018 was a balanced one. On the one hand, tax proposals were introduced to the tune of R36 billion. On the other hand, Cabinet approved expenditure reductions to the tune of R85 billion. Both sides of the scale are seen as an effort to reduce the R48,2 billion revenue gap, as well as to provide for reallocation of budget spend to cater for new expenditure.
One such new expenditure stream is in respect of fee-free higher education. Since the announcement of fee-free higher education, questions have abounded on how exactly the government would implement this. All was revealed in the Budget Speech.
The Minister announced: ‘The largest reallocation of resources towards government’s priorities was on higher education and training, mounting to additional funding of R57 billion over the medium term. As a result, this is the fastest-growing spending category, with an annual average growth of 13,7 per cent.’
Former President Jacob Zuma commissioned the Heher Commission of Inquiry into Higher Education and Training to consider the feasibility of providing fee-free higher education. The Former President released the report on 13 November 2017 and indicated that he would make a pronouncement on the report once he and certain ministers had concluded their review of the report. On 16 December 2017, the Former President announced that Government would subsidise free higher education for poor and working class students. Once the horse had bolted, the government could only follow it by implementing initiatives to live up to the promise.
The Budget Speech states that fee-free higher education and training to students from poor and working class families will be phased in. The students who will benefit from this are students in their first year in 2018 at either universities or TVET colleges and with a family income of below R350 000.
These students will have their 2018 academic year funded in full. This funding will be rolled out in subsequent years of study until they complete their studies. From the 2018 academic year, students funded by the National Student Financial Aid Scheme (NSFAS) will have their loans converted to bursaries.
The move of granting fee-free education may be seen by some as a political move on the part of the ruling party, but no one can deny that education is an important cornerstone to addressing the imbalances of our past. In remembering an iconic statesman, reference is made to the views share by the late Former President Nelson Mandela. Said he about education in his autobiography Long Walk to Freedom:
‘Education is the great engine of personal development. It is through education that the daughter of a peasant can become a doctor, that the son of a mineworker can become the head of the mine, that a child of farmworkers can become the president of a great nation. It is what we make out of what we have, not what we are given, that separates one person from another.’
AUTHOR l Aakifah Louw is a member of the SAICA Tax Administration Committee and Massmart Group Tax Manager: Controversy
