Problem is no action

In terms of addressing the challenges highlighted by the rating agencies last week, Kyle Mandy at PwC says there is no lack of government plans and ideas floating about.

The problem is a lack of action to implement them. If government took decisive action on the 14-point growth plan, announced over four months ago, it would have gone a long way towards easing ratings agencies’ concerns.

“The biggest concerns lie with a lack of progress in relation to economic plans and the issues that are not addressed at all. This includes the rigid labour market and the poor quality of basic education,” she says.

It will take cuts across all departments to achieve the R25 billion cut in expenditure. A good start would be to dramatically reign in the wage bill.

“Cuts should then be made to eliminate or significantly reduce expenditure on programmes that are not priorities or under-performing, and even possibly eliminate or merge entire departments,” says Mandy.

South Africans are already bracing for tax increases in the form of a sugar tax, the scrapping of the zero-rating on fuel and threats of another increase in the marginal tax rate of individuals. Carbon tax is also looming.

Mandy says the sugar tax is unlikely to generate over R2 billion. The scrapping of the zero-rating on fuel could generate R18 billion to R20 billion.

Mandy says another increase in the individual marginal tax rate – already at 45% – is unlikely.

A 15% increase in the VAT rate would bring in about R20 billion in additional revenue, according to Mandy. Des Kruger at Webber Wentzel notes that the first interim Davis VAT Sub-Committee report concludes that raising the VAT rate will have a impact on inequality, but will be much more efficient than an increase in direct taxes.

“It is important to consider the longer run where increases in direct taxes dampen growth,” he says.