Populist policies make the road even rougher for SA
AsTreasury officials and Finance Minister Malusi Gigaba start their consultative meetings to discuss budget 2018, the funding of higher education will certainly be high on the agenda.
President Jacob Zuma announced free highereducation for students from poor households in December, shortly before he was replaced by Cyril Ramaphosa as the leader of the ANC.
Zuma also announced increased funding through the National Student Financial Aid Scheme for first-time students enrolling at technical and vocational education and training colleges and university students from households with a combined annual income of up to R350,000.
This ignored the views of the Treasury, the recommendations of the Heher commission — which was appointed by Zuma — and of the Davis tax committee. Both found that it was impossible to offer free tertiary education. PwC head of national tax technical Kyle Mandy says that without even considering the urgent need to fund Zuma’s promises, South Africans are already looking at R30bn in tax increases to fill existing tax-revenue shortfalls.
He says that in terms of current proposals for higher education, the funding needed for 2018 alone amounts to an additional R12bn and will escalate to about R50bn over the next three to four years.
Mandy says the government has no choice but to raise the value-added tax (VAT) rate to 15% to raise this kind of additional revenue.
“An increase of 1% will generate revenue of approximately R20bn. However, some of it will have to be ploughed back into social spending to provide relief for the poor and to appease the unions,” he says.
This leaves the government R15bn short for the next fiscal year, without considering funding for higher education.
University of Cape Town Graduate School of Business lecturers Sean Gossel and Misheck Mutize say in an article published on The Conversation that the cost of free education for poor students could be disastrous for a country already burdened by significant debt.
Debt-servicing costs for 2018 are estimated at R183bn.
“Retracting or delaying the policy are not options because either would likely spark civil unrest,” they write.
“But populist policies such as these condone financial indiscipline at the expense of much-needed fiscal consolidation. The consequences will be severely damaging to the country’s development for many years.”
Mandy says the simplest solution to this problem is an increase in the VAT rate, and reducing the size of the government by reducing the number of its departments, consolidating other departments and suspending or reducing some programmes that are not priorities.
However, this will not be sufficient and additional revenue will have to be raised from other taxes, including from personal income tax. Jaco la Grange, chairman of the personal tax work group at the South African Institute of Tax Professionals, says nothing prevents the government from increasing tax rates.
There is also nothing preventing it from introducing new taxes such as a graduate tax or an additional education levy. “The problem is the ability of South Africans to pay additional taxes or higher rates,” he says.
The fundamental problem facing SA is its bloated public service and the wage bill of government employees.
La Grange says that the losses to the fiscus as a result of state capture could be a source of income.
The Asset Forfeiture Unit, which forms part of the National Prosecuting Authority, wants to seize at least R50bn in several cases relating to statecapture investigations.
Former public prosecutor Thuli Madonsela laid bare the extent of state capture by government officials, prominent families and their cronies in her report published in November 2016. However, there are no guarantees that the money will be found and the government needs to fill the gaps now; it cannot rely on assets that may not be collected or that may take years to find.
La Grange says it would seem only fair if the money seized by the prosecuting authorities could be earmarked for educating needy South Africans. Mandy cautions against ring-fencing government income and refers to the state of affairs at the Road Accident Fund. He adds that a special education levy will increase the burden on taxpayers that are “incredibly strained”. The government could increase the skills development levy to 2%, which may generate income of about R16bn. The burden would then be imposed only on business.
“I always say that if you want less of something, tax it. A skills-development levy is taxing employment, which means you will have less employment. It increases the cost of doing business, the cost of labour and the result is less demand for labour and less employment,” he says.
Mandy says that some jurisdictions are considering the introduction of a graduate tax.
In SA, this would require high tax rates to generate significant amounts of revenue.
“The concern is that it may chase away graduates. Generally, graduates are highly mobile. You may be chasing away skills because of the added tax burden,” he says. “You also run the risk of people purposefully not graduating to avoid the tax.”
A reprioritisation of expenditure of R25bn has already been announced. The government will, however, need “expenditure reprioritisation” of closer to R56bn. The public-sector wage bill can be kept in check by freezing increases.
Mandy says that this is the kind of hard decision the government will have to make.
“The jury is still out whether there will be sufficient political will to do what is needed to be done,” he says.