Gordhan will be checking sofa for coins
With just under a month to go until budget day on February 22, the tax community is powering up its collective crystal ball to try to predict where Finance Minister Pravin Gordhan will find the money he needs to keep the ratings agencies off his back.
Not that the need for SA to start reining in the public debt is just about the ratings agencies. The more money the government has to borrow now to finance the gap between what it spends and what it collects in tax revenue, the more it burdens current and future generations with the need to pay back the money. As it is, debt levels have been rising faster than the economy has been growing and the interest on the public debt is the fastest-rising item of government spending.
The Treasury has been promising for a while to cap the public debt level, but it has proved to be a challenge in an environment in which economic growth and, therefore, tax revenue have fallen short of budget targets, while the political will to cut spending is limited.
A year ago, Gordhan had to add R15bn to tax revenue targets for each of the next two fiscal years to plug the gap. Then in the October medium-term budget, he added another R13bn to the 2017-18 revenue target, bringing the total to R28bn. That number could edge up to about R30bn in February’s budget or down with a bit more saving on expenditure. That’s relatively small in the context of a total tax take of more than R1-trillion, but how much damage it will do to an ailing economy depends on how it is collected.
For crystal-ball gazers, it’s really about puzzling out how Gordhan does it, assuming he can’t do the obvious: raise the value added tax (VAT) rate.
A range of macroeconomic arguments favour the VAT option. The rate is quite low by international standards and SA relies much less than most other emerging markets on indirect taxes such as VAT (and the fuel tax and excise duties) and much more on income taxes — personal and corporate. Indirect taxes distort economic decision-making less than direct income taxes do. Against that is the argument that these taxes hurt the poor more than they do the rich.
The counterargument is that you have to look at the whole fiscal package including the spending side, to see whether an increase in the VAT rate really would hurt the poor disproportionately. SA’s budget is already one of the world’s most redistributive, according to a World Bank study. If the government hiked VAT, but used the money on pro-poor spending, for example on increasing social grants, the poor would end up better off. Whether that would be the best way to deploy the extra funds is a different question.
Meanwhile, everyone is guessing that the government doesn’t have the appetite to hike VAT — and not only or even mainly because it would be politically unpopular, but also because the government wants to keep a VAT hike in reserve for when it needs a large bunch of extra cash to fund promised initiatives such as National Health Insurance or social security reform.
In his efforts to get more from indirect taxes, the finance minister has hiked the fuel levy and sin taxes quite significantly in the past couple of years — without taking much political flak — but only VAT has the potential to really fill the revenue hole. A single percentage point hike could raise up to R22bn in the first year. Gordhan should surely start floating it as a possibility for the medium term.
But assuming it’s not one for now, that leaves mainly income taxes and some smaller taxes including the sugar tax. Raising corporate income tax would make SA’s competitive position even worse and send all the wrong signals to investors. So, it has to be personal income tax, which is heading up towards 40% of the total tax take and is already “highly progressive”, according to the 2016 Budget Review. Of 13.7-million registered taxpayers, fewer than 1-million individuals contribute 64% of personal income tax revenue. Taxing them more could cut consumption and curb consumer confidence and economic growth even further. And there is a limited amount that can be extracted from quite a small pool, especially if Gordhan wants to avoid putting too much of the burden on low- and middle-income taxpayers. But the effect on consumption might be muted overall.
And with income inequality in the spotlight and wealth taxes in vogue, the minister will be looking to put together a package of measures to deliver the necessary. The package could include another increase in the maximum marginal rate for those earning above a certain level of income, which could yield at least R2bn-R2.5bn, as well as tweaking capital gains tax and estate duty to yield a further R2bn-R3bn. Then there’s up to R12bn-R15bn more if the minister gives no relief for fiscal drag or gives partial relief mainly to lower-income earners, as he did in 2016. All of that starts to approach R20bn or so, leaving the team the tough task of finding the rest from fuel, sugar, sin or whatever.
In 2018, the task might be simpler if the tax and foreign exchange amnesty (the Special Voluntary Disclosure Programme) yields the hoped-for sums.
But the minister can’t keep kicking the can down the road and extracting more tax each year from a stagnant economy, so only higher growth rates offer any sustainable solution to the revenue problem. And as long as taxpayers aren’t too comfortable about the way government spends the money, he can’t be assured they will keep coughing up.
THE GOVERNMENT WANTS TO KEEP A VAT HIKE IN RESERVE FOR WHEN IT NEEDS A LARGE BUNCH OF EXTRA CASH TO FUND PROMISED INITIATIVES