Kathy Gibson reports – The budget tabled by Finance Minister Enoch Godongwana on Wednesday offers very little benefit for small and medium enterprises (SMEs).
Despite the fact that SMEs provide about 60% of the private sector jobs in South Africa, tax increases in the form of value-added tax (VAT) and personal bracket drift will have a big impact on SME profitability, says Garth Rossiter, chief risk officer at Lula.
“The president, in the state of the nation address (SONA) spoke about SMEs being lifeblood of the country, but the budget doesn’t do much for them,” he says.
Possibly the most disheartening part of the budget for SMEs is seeing the bulk of the VAT increases going to public sector wages. “This is while SMEs are having to retrench, fire or reduce their workforces,” Rossiter says. “This is pretty tone deaf.”
As a group, SMEs contribute one-third of South Africa’s GDP, but more needs to be done to grow this base, says Rossiter. “The solution for South Africa’s economic performance is a thriving SME economy.
“There could have been more in the budget to help do that, such as increasing the threshold in turnover tax, or removing some of the compliance burden.”
At the same time, SMEs would have preferred to see more detail on how government aims to reduce costs while growing the economy, he adds.
There were some positives, including a commitment to infrastructure spend and to providing electricity certainty.
“If we can provide the environment for SMEs to thrive, that is great. And improving electricity, roads and ports will help SMEs to be more efficient.”
A commitment to keep company tax rates where they are is a recognition that they are already at their maximum, according to Rossiter.
“The budget is giving more money to SARS to improve collections, which is great. But unless government is growing the top line or reducing expenses at the bottom line, SMEs are not going be benefit.”
Most SMEs would like to see more about how government is reducing its wage bill, Rossiter adds. “I want to see where the money is being spent, especially considering the average public sector wage is R41 000, versus R26 000 in the private sector.”
The Budget does little to alleviate the harsh economic conditions that SMEs live under.
A recent Lula research paper, “SME Survival in a Harsh Economic Climate”, lays bare the environment that SMEs have been trading in.
For instance, SMEs’ turnover has dropped by 50% to 60% down in last 12 months. The VAT increase will further reduced strained margins, because often SMEs are not able to pass these increases on to customers.
“SMEs have been under a lot of pressure,” Rossiter stresses. “GDP has flatlined over the last three years. And actual employment figures have shown a decline since 2023 – including jobs that are being lost in the SME sector.
“Bracket creep means people effectively pay more tax, and this just puts more pressure on individuals and consumers.”
At the same time, Experian data shows that business defaults among SMEs are up, with 75% more defaults than in July 2022.
While inflation has been coming down, interest rates have been consistently high. Unless those come down in line with inflation, consumers won’t be motivated to spend, Rossiter adds.
A poor payment culture puts SMEs under cash flow pressure: SMEs wait 70 days to get paid on average, compared to 52 days for corporates.