Budget 2012 Challenges

Budget 2012 Challenges

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The 2012 Budget Speech, to be delivered by Minister of Finance Pravin Gordhan this week, is likely to be the most challenging budget delivered in over 20 years. According to Professor Andre Roux, Director: Institute for Futures Research, University of Stellenbosch Business School (USB), amid widespread economic turmoil, the key challenge will be to bridge the gap between very difficult socio-political expectations and fiscal limitations, while at the same time maintaining fiscal responsibility and fostering a long-term job creating environment.

“The major short-term social and political concerns that are likely to be addressed next week stem from last week’s State of Nation Address and the National Development Plan vision for 2030. These issues include job creation, alleviating poverty, narrowing the income gap, infrastructure development and service delivery. There is also lingering uncertainty regarding nationalisation and land reform,” says Roux.

Global vs local

The biggest cross-cutting challenge here is that these issues need to be addressed in the midst of a global and local slowdown. The IMF has downgraded global growth by 1%. Furthermore, widespread uncertainty throughout the Eurozone is having a major impact on growth rates. Even BRICS countries are likely to have a lower outlook than last year. Already the IMF’s growth rate forecast of 3.6% last year has been downgraded to 2.5% moving into 2012. This means that there is little room for GDP to expand any time soon and the tax base will remain limited.

“Meanwhile, the budget deficit needs to be kept in manageable proportions as it becomes increasingly difficult to keep it from escalating,” says Roux. “Locally, emerging inflationary pressures such as interest rates, fuel price volatility and high electricity prices all create a very claustrophobic economic environment.”

Inevitably, sin tax rates will be raised, but what about other forms of taxes? We probably cannot expect significant tax relief. If any personal tax relief, it’s certain to be modest. One also wonders whether there will be an announcement on taxation on mines although, given the recent performance of the South African mining industry, this would be an ill-advised move in terms of stimulating the growth of the industry.

The question of national health insurance

“Then there is the issue on the National Health Insurance (NHI) and whether – or to what extent – tax payers will be expected to pay tax on the NHI,” says Roux. “However, one must bear in mind the impact of additional taxes on South Africa’s high savings deficiency. There is a strong need for mechanisms to encourage domestic savings and one would like to see the Minister introducing measures to meaningfully incentivise savings.”

Solid expectations

“All in all from a ‘fiscal bookkeeping’ perspective we can probably expect a respectable and solid 2012 Budget with a few surprises for households, as they may well be urged to tighten up on their savings,” concludes Roux, adding that what would elevate the speech to a memorable and strategically significant one is a set of concrete and plausible answers to the following questions/ issues:

  • To what extent will the fiscal policy resonate with the objectives of the National Development Plan vision for 2030?
  • Will there be meaningful proof that corruption will be addressed by fiscal authorities?
  • What feasible proposals will the fiscal authorities offer as incentives for small business and entrepreneurs?
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