Pravin Gordhan presented the Budget Speech 2017, under challenging economic conditions both globally and locally. Some significant changes were implemented this year affecting both individuals and companies. Can an economy continue to survive on a less than 1% growth rate?Mr Gordhan highlighted that GDP was 0.5% this past year. Some major contributors to slow growth is, a stagnant global economy and inconsistency in local policy, the uncertainty is affecting investor confidence in our beautiful country and thus slowing growth. The new target for GDP in 2017 is 1.3%. This rate of growth is not something to jump up and down about, considering the slide in the currency last year and inflation rates impacting households.
Debt continued to rise to R2,2 trillion, with an interest bill of R169 billion per annum. The concerning point is that budgeted expenditure of R1,56 trillion remains higher than budgeted income of R1,41 trillion. Which means South Africa will go deeper into debt this year. Is this good business planning? Remember when budgeting for your business, income needs to be higher than expenses. This is a basic principle that will create a profitable business. This is an over simplification for running a country but the principle remains. Income higher than expenses produces profit which reduces debt.
The dividends tax increase to 20%, this next financial year, has a dramatic impact on the way business manages profitability. Internationally a dividends tax of 15% is seen to be the norm. The 20% increase will have an impact on companies and it will be interesting to see how international investors respond when they find they are earning 5% less from their investments. After a difficult financial year ending 201702 business is already under pressure. An increase in dividends tax could push business owners to increase salaries, if possible, and pay higher personal income tax.
Salaries above R1,5 million will now be taxed at 45%. Bracket creep on the tax table means a number of other salary brackets are also going to feel the pain.
These two moves are very interesting in the light of needing to encourage greater local and foreign investment. There were repeated calls for us, as South African's, to understand the need to take the hard hits now so that the debt can be reduced. At the same time these changes and other international tightness are going to put pressure on international investors to really consider whether South Africa is the place to invest. The thought process of Mr Gordhan is however understandable considering the difficulties he and his team are facing in trying to reducing governments waisted expenditure. We all have a role to playing in making our economy grow. We should spend this year working really hard to try achieve a better growth rate.
Asset development and expension should be focused on establishing programs that create growth in the economy. Grant and other project funding should create sustainable business entities. Income, Grants and Profitability should be used to expand and ensure stability of business and projects. Is government funding creating sustainable opportunities or endless pits that need to be sustained by taxpayers funds?
News supplied by Business Soul Accounting.