SAIPA breaks down budget over breakfast

South African Institute of Professional Accountants
2 March 2020

On 27 February, the South African Institute of Professional Accountants (SAIPA) hosted its Annual Budget Breakfast at The Wanderers Club in Illovo, Johannesburg. The event which saw almost 200 attendees as well as a Live Stream audience, came the morning after Finance Minister Tito Mboweni’s National Budget Speech and served as a platform to review his announcements.

A keynote address by Judge Bernard Ngoepe was followed by a presentation on the budget highlights by Ettiene Retief, the Institute’s Chairman of the National Tax Committee. Below are the top take aways.

Union influence
In his address, Judge Ngoepe said the government had correctly contextualised the country’s economic problems and had made plans to address them. However, he asserted that they would not follow through on wage bill reduction or SOE restructuring to the full extent indicated, given the strong influence of the unions to obstruct policy execution. “Don’t hold your breath,” he said.

Unrealistic growth projection
Covering the highlights of the budget, Ettiene Retief noted that last year, the government had projected growth of 1.5 percent, but only achieved 0.3 percent, and this year project growth of 0.9 percent. He said this figure is possibly overestimated as the country could not sustain growth of just 0.3 percent, before considering current economic forces, like the effects of the coronavirus on trade with China and the impact on tourism, and the lack of stable electricity supply.

Tourism and agriculture
According to Retief, government could make significant strides in its goals in boosting both tourism and agriculture by legalising marijuana beyond only medical use. Also, government needs to consider how to support the agricultural sector, which includes means to ensure sustainable water supplies. “Certain foreign states have quite literally balanced their budgets, taking them out of the red into profitable positions purely on the basis of legalising and regulating marijuana usage,” he said.

Water security
Retief said that an important economic factor that had not been addressed in either the SONA or the Budget Speech was water security. “We do not at the moment have a sustainable water policy; we’re not even smart in how we use our water in terms of agricultural usage,” he said, noting that this was the one resource without which agriculture could not flourish. We have already experienced water resource shortages, and this matter will require significant infrastructural send.

The effect of 4IR
Retief explained that the Fourth Industrial Revolution will automate many repetitive tasks, and that this could result in economic growth but does not create more jobs, unless we prepare the labour market to the changing demand in respect of skills. The person currently doing the job must be deployed somewhere else, possibly in a different sector or doing a different task. “I don’t think we’ve really understood how our tax base is evolving, how it’s changing, how it’s going to stay sustainable for the next few years,” he said.

Reducing corporate tax rates
The Organisation for Economic Co-operation and Development has reported that there is an international trend for corporate income tax rate cuts. The average corporate income tax rate across OECD countries is 23.9 per cent, which was 32.5 per cent in 2000. A lower corporate income tax rate could reduce the risk of Base Erosion and Profit Shifting. However, various studies found that a reduced corporate income tax rate does not yield greater tax revenues or significant increases in investment, said Retief in response to government’s proposal to reduce corporate tax rates.  While the corporate tax rate should not be high, we should avoid participating in the “race to the bottom”, and “we should not try to get business here because we’re reducing corporate tax rates.”

The speakers and participants in a discussion panel that concluded the event all painted a picture of a budget that does not face the reality of an economy in need of desperate remedial action.