Budget Speech 2015: The good, the bad, and the ugly

Finance Minister Nhlanhla Nene, presented his budget speech for 2015 today (Wednesday, 25 February). Moneybags journalist, Ashleigh Brown, analyses the contents of the speech and asks what the outlook for 2015 is.

Treasury’s People’s Guide says that “a budget represents how a government responds to its society’s aspirations.” If that is true, then I am unsure what our government thinks of our aspirations.

There are many problems facing the South African economy. The problems include: Eskom (need we say more?), the fact that we are still recovering from the embarrassment from the State of the Nations Address, our mines cannot operate at full capacity, and that 45% of credit active consumers in South Africa are struggling to pay off high amount of debt. These are just a handful of the problems we face. If I were to list them all, you’d probably fall asleep.

Yesterday, (Tuesday, 24 February) the Democratic Alliance presented their Alternative Budget speech, showing how they would run the country, if they were elected in. Their main plan highlighted the need for growth employment, education, and small business, while cutting back on unnecessary expenditure.

Today’s speech was not much different, though it focused more on how taxpayers were going to help fix the problems we are facing currently, and less on how government was going to cut its own expenses.

Income taxes will be increased for everyone except for low income earners, you will now pay more for alcohol and cigarettes, and even help the government fix the Road Accident Fund.

We are going to look at the tax increases, pensions, unemployment funds, and what is happening with state owned companies.

Economic growth

The People’s Guide says that South Africa needs about 5% growth a year in in order to reduce unemployment and poverty. At the moment, we are only achieving 2%, and are expected to reach 3% by 2017.

“The South African economy faces a difficult few years ahead. Some of the difficulties are the result of a week global outlook, while others have to do with the structure of our economy,” says Lungisa Fuzile, the Director-General of National Treasury.

He went on to say that slow growth means that the economy does not generate the tax revenue needed to balance out the budget.

And the problems with Eskom only worsen the situation.

“It is now clear than the electricity shortages will constrain economic activity over the period ahead,” says National Treasury.

Adding to that, the unemployment figures for this year are 24.3%. Of that, 67.5% are young professionals. As the DA pointed out yesterday, there needs to be effort put into helping South Africans find work.

Though, with such a low growth outlook (and perhaps junk status awarded by ratings agencies on the cards), how is South African going to achieve this?

Below we look at some of the ways government is going to try and stabilise the economy, and perhaps help growth.

Income tax increases

Nene highlighted that tax revenue will amount to R14.7 billion less than last year. Therefore, tax reforms are necessary.

“Tax policy aims to raise revenue in a manner that is fair and efficient, while contributing to social solidarity and supporting long-term economic growth and job creation,” says Nene.

Personal income tax rates will be raised by one percentage point for all taxpayers earning more than R181 900 a year.

For example, someone who earns R16 666 a month, and is younger than 65, will pay R21 more a month for tax.

Tax brackets, rebates and medical scheme contributions will also be adjusted for inflation, explains Nene.

That means that anyone earning less than R37 500 a month, will see some tax relief. Whereas those earning more, will be taxed more heavily.

However, the DA disagrees with this approach, stating that an increase in income tax is not needed at all provided that corruption, mis-spending and maladministration were addressed.

Fuel levy increases

There will be an increase in the fuel levy by 30.5 cents a litre, which will take effect in April.

Adding to this, and extra 50 cents per litre will also be added to the fuel levy in order to help the Road Accident Fund (RAF).

According to the National Treasury, the current RAF system is unsustainable. This is because the RAF has accumulated R98 billion in unfunded liability.

Therefore, Nene highlighted that there is legislation to establish the new Road Accident Benefit Scheme, which will be tabled later this year.

The extra 50 cents per litre of the fuel levy will only be implemented once this new system is in place.

“We should expedite this process and try to compensate the victims,” says Nene.

Eskom and SAA

The energy problems that we are facing are more than just annoying. As the average person, and business get switched off at awkward times, the power constraints are damaging our economy even more than our patience.

“There is a risk that the economic effect [of Eskom] will be even more pronounced,” says Treasury.

Treasury adds that government is working to limit the effects of inadequate electricity supply. And that large businesses are continually encouraged to lower electricity consumption.

Eskom will receive a R23 billion capital injection to help it with its financial problems, and to alleviate the power constraints.

Nene pointed out that this will be done in a two-tier programme.

The first R10 billion will be given by June this year. The last R13 billion will be given before the end of the year.

However, Nene would not comment on what core state assets are to be sold, or have been sold in order to help raise the money for Eskom

Another state-owned company which is struggling, is South African Airways (SAA).

“SAA reported a net loss of R2.6 billion in 2013/14, as a result of high operating costs, losses on several international routes, and valuation adjustments,” says Nene.

The government has made guarantees of R14.4 billion for SAA, or which the company has withdrawn R8.3 billion.

However, there are now reports that SAA is mandating Mango to offer domestic flights,  as the no frills airline has cheaper costs Mango, and has garnered more popularity.

The last state-owned company to be given some extra money is the South African Post Office (SAPO). It has also been guaranteed some money on condition of the implementation of their turnaround strategy.

“This involves revised universal service obligations and delivery targets, taking into account the decline in the mail and courier business and the shift to digital communication,” says Nene.

The budget speech was long, with some questions left unanswered. We don’t, for instance know exactly when the National Health Insurance white paper will be given to parliament. How exactly Eskom will be funded was also left out while there was no more information given about pension reform.

There’s no doubt that South Africa is in a difficult position, and it’s difficult to see the positive side of things. Most taxpayers, bar the low income earners, will be squeezed and so will motorists.

While home owners will pay more in electricity and if they intend to upscale their home there’s a likelihood of them paying more in transfer duty.

It remains to be seen how the consumer will cope with this financial burden, while seeing very little benefit in the short term.

Justmoney also attended the budget speech, and has an article with more information on what to expect, click here.