Will budget balance debt reduction with growth incentives?
Treasury’s foot-dragging in providing tax breaks and other vital incentives is not doing the government’s investment drive any favours
After nine wasted years, President Cyril Ramaphosa is on an investment drive. His investment conference last year saw firm public pledges that new investment will flow.
In his recent state of the nation speech he boasted: “The conference provided great impetus to our drive to mobilise R1.2-trillion in investment over five years ... The investment conference attracted around R300bn in investment pledges from South African and international companies. There was also a significant increase in foreign direct investment (FDI) last year. In 2017, we recorded an inflow of FDI amounting to R17bn. Official data shows that just in the first three quarters of 2018, there was an inflow of R70bn. This is a phenomenal achievement compared to the low level of investment in the previous years”.
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A number of efforts are underway to encourage investment — from a reform of the visa rules to boosting connectivity and a new mining charter that provides much-needed clarity. However, foot-dragging by the National Treasury in funding and committing to some of the most vital investment incentives is pulling investors in the opposite direction — discouraging investment, not nourishing it. The manufacturing and energy-intensive sectors on which I focus face confusion and uncertainty about the often deal-swinging incentives available to business.
The issues around the multi-billion rand Section 12I tax rebate incentive, which is provided to medium to large investment projects in manufacturing, is possibly the most irritating. On the one hand, the period during which the trade and industry minister can confer the incentive to qualifying projects has been extended. But without a concomitant increase in the budget the extension is meaningless.
It means the incentive is there without the necessary resources. So when advising investors you just cannot be sure whether the tax breaks will be available. Or if they are approved, they are approved subject to money being available, which is also meaningless. This is absurd, damaging to the president’s investment drive, and needs to be sorted out. The ball is in the National Treasury’s court: the department of trade and industry (DTI) has asked for more money, and it is my fervent hope it will be provided. For existing and potential investors in the manufacturing sector this is a major issue in the February 20 budget.
The Treasury’s concern that it cannot afford to forego potential tax revenue does not make sense. The design of the incentive is such that potential income tax revenue is foregone only if a prospective project is established and is already contributing to fiscal revenue through personal income tax, VAT and other indirect taxes. Given the catalytic and strong forward and backward linkages of manufacturing projects, on a net basis government is likely to gain rather than forego revenue from approved projects.
The tax foregone is normally quite low, but the impact the incentive can have on investment decisions is big. And a recapitalisation of Section 12I will send a signal about us being open for investment. More manufacturing projects being established will mean more investment, more exports, more jobs and, yes, more taxes. Everyone is a winner if you look at the full picture. But certainty is not only required on 12I, — clarity is also needed on the energy-efficiency incentive, offered through Section 12L of the Income Tax Act.
Section 12L provides tax rebates for businesses that invest in more energy-efficient equipment and/or processes. The incentive scheme been running for seven years, but was quite ineffective in the first two years as the tax rebate was set quite low. Only once it became more generous was it worthwhile for firms to apply. The current period for applications and approvals ends in 2020, and the treasury has hinted that it will be extended as it is one of the key mechanisms for recycling revenue from the carbon tax, which comes into force in just a few months’ time.
I hope they do not leave announcement of the extension too late. We need details of the extended incentive this year as business requires confidence and clarity to plan, and projects do not just happen overnight. All this may sound a bit theoretical and academic and bureaucratic. But don’t be fooled. It is excellent that the DTI recently finalised its latest multi-annual support blueprint for the car industry, which enjoys the slightly grandiose title of “masterplan”.
The various iterations of the DTI car programmes brought certainty for investors in this sector and we can all see what this certainty does. The car industry has been the biggest investor, and the largest exporter, for the past decade, and we saw at the investment conference that the car investment boom is continuing.
Meanwhile, with the looming juggernaut of the carbon tax thundering towards us, there is still a lack of clarity on what will be done with the money that is collected. We have been told it will be ploughed back onto energy saving. But where are the details?
Of course, with the latest wave of economically damaging, and personally, irritating power cuts, we will be keenly waiting to hear the detail on Eskom’s rescue plan, which the president has said will be contained in the budget. Eskom would clearly like to fund much more energy saving and can do so with sounder finances. This may not be front-of-mind, but it is important both as a way of decreasing electricity demand and as another example of the imperative, practical steps that are needed to deal with climate change.
So, there is a lot that can be done for industry, and for the planet, in the budget. Hopefully finance minister Tito Mboweni will deliver a budget that balances the need to reduce government debt levels with providing incentives for growth.
• Chipfupa is a founding partner at Cova Advisory.