VAT rise could have put SA in recession

Treasury director-general says we must do better with what we have, writes Craig Dodds

INTRODUCING a VAT increase this year – as many had expected – could have tipped the economy into recession, the Treasury said in Parliament.

Responding to comments from civil society stakeholders on the Budget hearing this week, Treasury director-general Lungisa Fuzile said that of all the available tax options VAT was the one that would have had the most immediate impact on economic growth.

Economists and tax experts have asked why Finance Minister Pravin Gordhan did not opt for a VAT increase in the Budget, given that former minister Nhlanhla Nene had put the possibility on the table in the medium-term budget policy statement in October.

“Our modelling showed that in addition to a host of things, positive and negative, it would have had the most negative impact in the immediate term on growth,” said Fuzile.

“When growth is slowing, it would be unwise to increase VAT because it could easily drive an economy into a recession.”

He said in a situation of rapid growth the negative impact of a VAT increase would be “more tolerable” because it would merely shave some of that growth.

This would seem to make a VAT increase unlikely for as long as the economy remains in the doldrums, even though the Treasury has committed to finding additional revenue of R30 billion between next year and 2018.

Fuzile said the use of limited compensation for fiscal drag in tax relief had been a gentler way of raising a significant sum without hurting lower-income earners.

“Tax as a percentage of gross domestic product has risen to about 24 percent and will be 27.8 percent by the 2018/19 fiscal year, so it has drifted up,” said Fuzile.

“There is no magic number, but when you get to the levels we’re at, you begin to ask if we are perhaps taking too much from the economy in the form of taxes.”

This meant some of the adjustment for fiscal consolidation had to come from reducing expenditure.

“We must taper the way in which expenditure grows to be more in line with what the country can afford,” he said.

While there were concerns that cutting government spending could limit growth, the Treasury had tried to “spread the impact” of the adjustment between spending cuts and tax increases in a way that ensures no part of the system bears too much of the burden.

“The idea was to ensure the impact on growth was kept to the bare minimum.”

There was no room for monetary or fiscal policy measures to boost growth – only a better use of the available resources would help.

“When resources are as constrained as they are now, we had better realise that improvements and movements forward aren’t going to come from throwing more resources into the system, but more from a more efficient use of what is already there,” said Fuzile.

As a former teacher he was “appalled”, for example, that while more resources were being poured into the education of “a black child than at any time in history, the quality of the outcome leaves a lot to be desired”.

“And people still find excuses. I’m not saying there are no problems. I should not be misunderstood – there still are challenges.

“But the situation is better now than when I was a pupil and when I was a teacher. If only we could appreciate that our success as a country in many areas depends almost entirely on what we do to fix our education system.

“Let’s do the best we can with what we have, to produce the most desirable results,” said Fuzile.