A bad idea

Im­por­tant prin­ci­ples at stake

Finweek English Edition - - Economic trends & analysis - GRETA STEYN

THE WEST­ERN CAPE GOV­ERN­MENT will be­come the first prov­ince in South Africa to in­tro­duce new taxes when it im­ple­ments a 10c/litre fuel levy next year. Gaut­eng is also con­sid­er­ing rais­ing new taxes. Should th­ese de­vel­op­ments raise con­cern that the prov­inces will cause SA’s tax bur­den slowly to creep up­wards? Does it make sense for the prov­inces to raise their own taxes?

The West­ern Cape’s plans have gen­er­ated con­tro­versy, with Cosatu even threat­en­ing to take protest ac­tion. But it’s im­por­tant to note that the fuel levy will raise only R300m – a tiny drop in the ocean when seen in the con­text of Gov­ern­ment’s planned al­lo­ca­tions to prov­inces in the 2008/2009 fis­cal year of R229,3bn. The ad­di­tion to the tax bur­den won’t be felt, and there won’t be a no­tice­able ef­fect on the West­ern Cape econ­omy. It’s not as if busi­nesses will re­lo­cate from the West­ern Cape to es­cape the tax.

The ar­gu­ment in favour of pro­vin­cial taxes holds that it’s a more trans­par­ent and demo­cratic way of do­ing things. Lower tiers of gov­ern­ment are closer to or­di­nary peo­ple be­cause that’s where the de­liv­ery hap­pens and it’s eas­ier for cit­i­zens to hold those spend­ing au­thor­i­ties di­rectly ac­count­able for de­liv­ery. The West­ern Cape is rais­ing the money to pay for road build­ing and main­te­nance and its cit­i­zens will be able to see clearly whether their money has been well spent.

But what if some prov­inces go crazy and start tax­ing peo­ple to death? That can’t hap­pen, as the Con­sti­tu­tion stip­u­lates that pro­vin­cial tax-rais­ing can’t be im­ple­mented “in a way that ma­te­ri­ally and un­rea­son­ably prej­u­dices na­tional eco­nomic poli­cies, eco­nomic ac­tiv­i­ties across pro­vin­cial bound­aries or the na­tional mo­bil­ity of goods, ser­vices, cap­i­tal or labour”.

One of the ar­gu­ments against al­low­ing prov­inces to raise their own taxes is the fact that it favours rich prov­inces at the ex­pense of poorer ones. The poor prov­inces don’t have the tax base to be able to raise taxes and have pro­por­tion­ately less avail­able to spend than their richer coun­ter­parts.

Gaut­eng has in­di­cated that it’s also con­sid­er­ing rais­ing taxes. That was first mooted by fi­nance MEC Paul Mashatile in the pre­sen­ta­tion of his medium-term bud­get last year. The com­ment was met with howls of protest from op­po­si­tion par­ties.

Mashatile’s spokesman Percy Mthimkulu says the prov­ince has un­der­taken a study to de­ter­mine whether it will be fea­si­ble to in­tro­duce new taxes or levies. The study has been com­pleted and Gaut­eng’s ex­ec­u­tive coun­cil is con­sid­er­ing its find­ings. “The ex­ec­u­tive coun­cil will take into ac­count the big pic­ture, in­clud­ing the fact that Gaut­eng will have a R1,6bn sur­plus in 2009/2010. We have to look at ex­ist­ing re­sources be­fore we con­sider any­thing else.”

Though Mthimkulu didn’t want to be drawn fur­ther, the im­pli­ca­tion of what he’s say­ing is that Gaut­eng won’t need to raise taxes be­cause it will be run­ning a sur­plus. Fears of a creep­ing tax bur­den would seem to be mis­placed, es­pe­cially given the con­sti­tu­tional guar­an­tees. Still, once the door has been opened to a fuel levy, you can be sure it will rise in fu­ture years.

The fact is that there are im­por­tant prin­ci­ples at stake. How do new taxes square with the fact that the prov­inces are bat­tling to ful­fil their spend­ing obli­ga­tions? They’re al­ready sit­ting on un­spent funds, so why should the tax­payer cough up more?

A spokesman for West­ern Cape fi­nance MEC Lynne Brown says the prov­ince is pro­ject­ing to spend “close to full al­lo­ca­tion” of the R1,3bn al­lo­cated on roads in its 2006/2007 fis­cal year. But that’s not quite a sit­u­a­tion of se­vere strain that re­quires ex­tra­or­di­nary mea­sures.

An­other rea­son why it doesn’t make sense to plan for new taxes now is the fact that the prov­inces’ con­tin­ued ex­is­tence is be­ing called into ques­tion. The ANC has is­sued a draft dis­cus­sion doc­u­ment that in­cludes a sec­tion on the fu­ture of prov­inces in SA’s gov­er­nance model.

The ar­gu­ment in favour of pro­vin­cial taxes holds that it’s a more trans­par­ent and demo­cratic way of do­ing things.

The doc­u­ment strongly sug­gests that the ANC favours re­dis­tribut­ing re­sources away from the prov­inces to­wards lo­cal gov­ern­ment. Lo­cal gov­ern­ment is where gov­ern­ment is clos­est to the peo­ple and where trans­parency and ac­count­abil­ity in de­liv­ery are most vis­i­ble.

The dis­cus­sion doc­u­ment says there are three op­tions. First, to re­tain the sta­tus quo, but to im­ple­ment changes within the frame­work of the Con­sti­tu­tion. Those changes would be aimed at strength­en­ing lo­cal gov­ern­ment.

Sec­ond, to re­move the pro­vin­cial sys­tem al­to­gether, leav­ing a two-tier sys­tem of gov­ern­ment. That would re­lease sig­nif­i­cant re­sources and ca­pac­ity for lo­cal gov­ern­ment. The third op­tion is to re­duce the num­ber of prov­inces.

The doc­u­ment says: “The three-sphere (sic) sys­tem is a com­plex sys­tem to op­er­ate, which re­sults in in­ef­fi­ciency, over­lap­ping roles, long de­ci­sion-mak­ing pro­cesses, weak in­for­ma­tion flows and the dis­per­sal of pub­lic sec­tor skills and ex­pe­ri­ence within the State.”

PRO­VIN­CIAL REV­ENUE AND EX­PEN­DI­TURE 2005/06*

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