Seifsa warns tax increases could harm productive sectors of economy

26th February 2015

By: Ilan Solomons

Creamer Media Staff Writer

  

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The Steel and Engineering Industries Federation of Southern Africa (Seifsa) is worried that some of the tax increases announced by Finance Minister Nhlanhla Nene in his budget speech on Wednesday, will negatively impact on the productive sectors of the South African economy.

In a post-budget media briefing, on Thursday, Seifsa chief economist Henk Langenhoven commended Nene and National Treasury on a delicate balancing act given the poor performance of the domestic economy and the growing budget shortfall.

He added that it was, nevertheless, “very concerning” that, with the exception of sin and personal taxes, “virtually all the announced tax measures will hit the productive sectors of the economy the hardest”.

“Politically, it may make sense not to have raised value-added tax, or VAT, but the choice of indirectly burdening the productive side of the economy is a critical blow to growth and investment for the foreseeable future,” he lamented.

Langenhoven added that the impact of slow economic growth and electricity constraints had “all but put a stop to other policies to stimulate the economy, bar low energy-intensive users”.

Further, he expected the country’s economy to remain depressed for at least the next seven years.

Langenhoven also lamented the 1% increase in personal taxes for high-income earners.

“The taxes that were announced on individuals will hurt mainly the largest consuming part of the population and will, no doubt, have a negative influence on consumption expenditure, further constraining economic growth. If anything, this budget highlights the extent to which institutional decay can throw the country’s path to prosperity off track,” he emphasised.

Fellow Seifsa economist Tafadzawa (Taffie) Chibanguza, meanwhile, noted that the “resounding message” from the budget speech was one of an economy in trouble.

He pointed out that the impact of intermittent electricity supply was clearly a concerning challenge that came through repeatedly in the speech and all the supplementary documents.

Additionally, Chibanguza highlighted that the threat of imports into the country remained particularly fierce, in light of the local cost base and disruptions caused by labour unrest and electricity supply constraints.

“Imports from Asia, predominantly China, make up about 50% of total imports into the metals and engineering sector.”

He said the threat of a slowdown in the Chinese economy could result in the Chinese “aggressively” looking for new markets to sell their products.

“This would place even greater economic pressure on local manufacturers, who are already struggling to compete in terms of prices with the existing Chinese suppliers,” Chibanguza stated.

He pointed out that Treasury anticipated that the weaker exchange rate may work as a disincentive for imports. 

“For the metals and engineering sector, we have seen some slowing in import growth relative to previous years. However, in an import intensive economy, this can also be a signal of poor domestic fundamentals,” he explained.
 
Further, he highlighted that the South African Reserve Bank and Treasury expected positive export growth numbers over the next three years of 3.3% to 5%; however, these financial institutions also expected import volumes to increase by as much as 4.6% to 5.5% over the period, thereby, further increasing South Africa’s trade imbalance in favour of imports.

Seifsa CEO Kaizer Nyatsumba, meanwhile, commented that South Africa’s reliance on a small base of taxpayers to provide more social benefits for the growing numbers of poor people was not sustainable.

He stated that it was “unfortunate” that the government continued to “squeeze” the middle class and higher-income earners, instead of working with the business community to grow the country’s economy and create sustainable jobs.

“As a country, we have a large civil service bureaucracy and, without a doubt, one of the biggest Cabinets in the world. Our priority should be [to ensure] that we have a lean and efficient public service that delivers value to the general public, with zero tolerance for any form of corruption,” he stressed.

He said government needed to grow the economy and wean people off social benefits and provide them with opportunities to be absorbed into the local job market.

“To accomplish that goal, the government has to acknowledge business as a vital partner and ensure that there is a strong partnership involving itself, business and labour, with South Africa’s best interests coming first,” Nyatsumba concluded.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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