Medium-Term Budget Policy Statement


The Medium-Term Budget Policy Statement (MTBPS) is a government policy document that outlines the government’s fiscal policy objectives and spending priorities over a three-year period.The MTBPS also sets out the economic context in which the forthcoming budget (February 2017) will be presented.With the slow-down in the South African economy, tax revenues have fallen short of expectations. This means that government spending will need to be cut and taxes will need to be raised.
  • The anticipated budget shortfalls are R36 billion and R52 billion in the next two years.
  • Following a series of expenditure cuts, the MTBPS proposes a further R26 billion in reductions to the public expenditure ceiling over the next two years.
  • New proposed tax measures amount to R13 billion in the 2017-2018 financial year. Together with the higher taxes indicated in the 2016 budget, total revenue increases will amount to R43 billion over the next two years.
With a great deal of pressure on the budget, government spending will be focused on core priorities and existing resources will have to be shifted to deal with more critical needs.

Credit ratings agencies have taken careful note of the contents of this MTBPS.  Fitch has just issued a report stating that “South African MTBPS Measures Will Not Stem Rising Debt” – this does not bode well for December 2016, when the ratings agencies will reassess South Africa’s credit rating.  A further downgrade in our country’s credit rating would indicate a higher investment risk, prompting higher borrowing costs and large capital outflows.

The MTBPS typically does not include specific tax announcements, but it does give an indication of future tax amendments.  It is unlikely that the additional measures such as the proposed changes to trust legislation, sugar tax, the tyre levy and the Special Voluntary Disclosure Programme will be enough to raise the additional R43 billion tax revenue which is required.

With our tax-base already under great pressure, it will be interesting to see exactly how National Treasury intends to collect this extra tax revenue.   It seems likely that taxpayers could be facing some unwelcome tax increases in February 2017, when a new blend of tax proposals will be announced.

 

2016 MTBPS Highlights


Finance Minister Pravin Gordhan delivered his Medium-Term Budget Policy Statement (MTBPS) to Parliament on Wednesday, 26th October 2016.

Unlike South Africa’s annual budget, this is usually a relatively low-key event, but this year, set against a backdrop of political and economic uncertainty, the MTBPS attracted widespread interest.

Emphasizing the need for government, business and all South Africans to work together to overcome this country’s problems, Gordhan quoted a Pedi saying:   “Lions that fail to work as a team will struggle to bring down even a limping buffalo”.

 

Here is a summary of some of the key points from the MTBPS:

  • South Africa’s economic growth estimate for 2016 has been revised downwards to 0.5 % from 0.9 %.
  • National Treasury forecasts a moderate recovery over the next three years, with GDP growth reaching 2.2 % in 2019.
  • The inflation forecast has been revised down to 6.4 % for 2016. Inflation is expected to remain around 6 % annually over the medium term, with upward pressure from electricity prices.
  • Government has budgeted R987.4 billion for infrastructure over the next three years, with large investments continuing in energy, transport and telecommunications.
  • Investment by general government is expected to average 4.8 per cent growth over the medium term, with investment by public corporations reaching 2.3 per cent growth in 2019.
  • Government predicts that there will be R23 billion less revenue than what was initially was forecast in the 2016 Budget Speech in February.
  • It is proposed that an additional R43 billion Rand will be raised through tax measures over the next two years, R28 billion of this will be raised in the coming financial year.
  • The expenditure ceiling will be lowered by R26 billion.
  • Consolidated government expenditure will rise by 7.6%
  • Additional allocations for tertiary education, healthcare services and social protection have been proposed.
  • A further R 9 billion for the National Student Financial Aid Scheme (NSFAS) over the period ahead (an additional 18% a year) has been proposed.

 

Government Funding of Post-School Education & Training


In the MTBPS, Pravin Gordhan announced that the government has provided for an increase in spending on university fee subsidies in response to the large-scale student protests.

On top of the extra R16-billion additional funding allocated in February 2016, the government has now increased funding to higher education by allocating a further R17.6 billion over three years to subsidise poor students.

he movement of university students demanding “fees must fall” has placed the issue of education funding at the centre of the policy debate.

Two concerns lie at the heart of the issue. First, despite massive increases in allocations to the National Student Financial Aid Scheme (NSFAS), the enrolment of academically deserving students from poor communities has grown faster than available funding. Secondly, there is no clear national framework for financing students who – although not affluent – are above the modest threshold established by the NSFAS means test. As a result, many students face financial hardships that undermine their ability to succeed academically.

Over the past 20 years, government has significantly expanded funding of education. Basic education is the largest item in the national budget. However, the education system is not achieving the desired outcomes. Priorities for government in the years ahead include expanding access to and the quality of early childhood development, overcoming institutional weaknesses in basic education, broadening access to effective vocational and technical skills, and improving the impact of resources devoted to vocational training. In all these areas, additional resources may be needed – and strong interventions to unblock institutional constraints are required.

Government’s current policy framework calls for the progressive expansion of post-school education within available resources. The largest gains in student access are envisaged in technical and vocational colleges. Improving the quality of teaching at these colleges and building stronger links with industry – so that skills are relevant and can support economic growth – are policy imperatives.

 

Further Changes to the Proposed Taxation of Trusts


National Treasury and the South African Revenue Service (SARS) recently published the second draft of the 2016 Draft Taxation Laws Amendment Bill (TLAB) for public comment.

The initial proposals have been considerably toned down in the second draft of TLAB.

A reminder of the initial proposals in the first draft of TLAB (July 2016):

  • In the case of interest-free loan to a trust, the lender would be deemed to have received interest at the official interest rate, and this interest would be included in his taxable income.
  • In the case of a low-interest loan, the difference between the interest charged and the official interest rate (currently 8%) would be added to the lender’s taxable income.
  • The R100 000 annual donations tax exemption would no longer apply.

These are the latest revised second draft proposals (September 2016):

With effect from 1 March 2017:

  • The deemed interest on interest-free and low interest loans will be treated as an on-going annual donation.
  • The R100 000 annual donations tax exemption may still be used, provided that the deemed interest on the remaining loan is included.

Public comments on the initial TLAB proposals emphasised the fact that interest-free or low interest loans to trusts are not only used to avoid estate duty, but also provide an important vehicle for many other objectives such as: to protect assets, to provide maintenance for disabled children, as employee incentive trusts and for public benefit organisations (PBOs).  Treasury agreed with this and said it would narrow the scope of the proposed amendment and that it will specifically exclude, among others, loans to:

  • Special trusts (established solely for the benefit of minors with disability)
  • Trusts that are legally defined as public benefit organisations (PBOs)
  • Vesting trusts (where the vesting rights and contributions of the beneficiaries are clearly established)
  • Loan used by a trust to fund the acquisition of the lender’s primary residence
  • Loans that constitute affected transactions and that are subject to transfer pricing provisions
  • Loans to a trust in terms of a Sharia-complaint financing arrangement

The Treasury has clarified that the draft proposals will to apply to all loans to trusts, including those in existence before 1 March 2017.

 

Sincerely,