The success of the 2020 budget rests on wage negotiations

Tax experts have called Finance Minister Tito Mboweni’s 2020 budget the most creative and well-thought-through they have seen in years.

However, its success rests on the outcome of government’s negotiations with trade unions on cutting the wage bill by a whopping R37.8 billion in 2020.

This must affect the multi-term agreement between the government and the public sector trade unions. Mboweni says government has started discussions to contain the cost of the final phase of the implementation of the current wage agreement.

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Tito Mboweni begins work to cut the public sector wage bill
Tax reprieve for South Africans in 2020

“Organised labour understands where we are. They have made constructive proposals on a range of issues.”

However, it seems this does not include Cosatu, one of the most vocal trade unions. It has called any review of the current wage agreement an “irresponsible and blatant act of provocation”.

Cosatu has warned the government to give workers what is due to them on April 1.

“The National Treasury’s fixation with cutbacks in public service, in the context of continued job shedding in the private sector, has severe implications for poverty and unemployment. This reckless approach will cause serious long-term problems for the economy,” it said in a statement in the run-up to Mboweni’s announcement on Wednesday.

Government intends to save even more on its wage bill in the 2021 tax year. It has budgeted for a saving of almost R59 billion and then, by 2022, the biggest saving of all will be R67 billion.

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The South African Emergency Personnel’s Union (Saepu) has thrown its weight behind Cosatu, saying it is rejecting the attempt by government to review the multi-year agreement that speaks about the adjustment of public service salaries over three years.

“As Saepu we also reject the review because we are currently working on a roadmap to the next salary negotiations scheduled for 2021. We cannot allow Treasury to dictate terms for bargaining because we are not going to leave it like that,” the union says.

According to Saepu, its members “are still earning peanuts, struggling with inflation and higher tax”.

But Mboweni says public service compensation has grown by about 40% in real terms in the past 12 years.

“Remuneration growth is increasingly out of line with the rest of the economy,” he said in his speech.

Reservations

Marcus Botha, director at BDO Tax Services, says it is somewhat telling that although the shortfall for 2020 is around R335 billion, government intends borrowing R370 billion.

The wage bill saving is all too close to the difference between the borrowings and the shortfall.

“The way that I interpret it is that if government is not successful in the negotiations with the unions, they have already provided for it by lending the money to pay for the salaries.”

It could be that we have already been set up for a bad outcome.

He welcomes the strategy to focus on the corporate income tax structure. Government wants to increase the tax base for revenue collections, mainly aimed at cross-border transactions.

Tax aspects

Government is trying to limit tax-planning opportunities and to strengthen anti-avoidance measures. “This is the correct approach to follow,” says Botha.

However, he has been caught off guard by the proposals to limit a company’s assessed losses to reduce taxable income and a restriction on interest deductions.

Government proposes restricting the offset of assessed losses carried forward to 80% of taxable income from January 1 next year.

Mboweni also proposed the restriction of net interest expense deductions to 30% of earnings after January 1, 2021. Botha says this goes against current tax principles and case law that has been established over years.

The limitation of interest deductions and assessed losses is part of the base broadening. National Treasury says rate reductions will be implemented in a “revenue-neutral manner”.

This means government first wants to stop the leakage from tax avoidance before lowering the rate.

Muneer Hassan, senior taxation lecturer at the University of Johannesburg, says it is clear that it wants to increase the income tax base from corporates to shield the impact of future rate cuts.

He says it is telling that our biggest trading partners – notably India, the US and the UK – have all recently reduced their corporate income tax rates to below 28%.

Chile, Ireland and Hungary have corporate income tax rates below 15%.