Budget bought extra time
After much speculation as to how Minister of Finance Pravin Gordhan would “plug the deficit” in his budget speech, he has chosen to rely on personal income tax (including trusts) by increasing the top-end rate from 41% to 45%, a dividend withholding tax increase from 15% to 20% (with immediate effect) and increased Fuel and Road Accident Fund levies.
The appropriate “tax mix” has also been a matter of discussion since the Davis Tax Committee (DTC) issued its interim Macro Analysis report for public comment in June 2015. The issue of engaging the “appropriate lever” to generate revenue was considered. The DTC released statistics which indicated that personal income tax and corporate income tax would need to be increased by 6% and 5% respectively, to generate the same increase in revenue as a 3% increase in VAT.
It is considered that a VAT rate increase would have a less negative impact on GDP and employment, since an increase in personal income tax may encourage a flight of skills and an increase in corporate income tax would be a disincentive to foreign direct investment.
Despite the statistics, Gordhan chose to rely on the same limited, “over-mined” tax base of individuals and actually acknowledged that the brunt of the increase would be borne by about 100 000 taxpayers only.
We need to ask ourselves whether he has engaged the “appropriate lever” for South Africa today in fulfilling an urgent need to raise an additional R28 billion of revenue. The answer confirms that this was the populist choice but not necessarily the most sustainable option.
There was mention that the litmus test of our programmes must be what they do to create jobs, but with no firm indication that the tax base of individual taxpayers will grow as a result of the proposed expenditure measures.
The increase in fuel levies is as regressive as an increase in the VAT rate, since every resident or visitor who climbs aboard a taxi, bus or car will be paying more. This will have a negative knock-on effect across the economy resulting in the same people paying more for the goods that they buy (albeit including additional VAT being collected).
We also need to ask ourselves what would soften the blow to the 100 000 taxpayers left carrying the can? Responsible government expenditure is the answer – but this was not promised. In fact, even if these taxpayers find alternative employment in foreign jurisdictions not taxing their income, and they spend 183 days outside South Africa in a 12-month period as a result thereof, they will be subject to tax in SA. They literally have no option but to exit SA altogether.
While foreign investors may favour the fact that the corporate income tax and VAT rates remain unchanged, they will be impacted by the increased withholding tax on dividends. Foreign investors who are not put off by their reduced dividend flows may find the lack of economic incentives to stimulate the economy and create jobs reason enough to disinvest or question whether to invest in South Africa.
Time will tell if the new rate changes will go the distance in plugging the deficit without the much-needed incentive measures in the private sector to stimulate the economy. The result is that the levers which were not pulled now may well need to be pulled in the future.
We have achieved “extra time” on the field but may ultimately lose the game anyway.
Time will tell if the new rate changes will go the distance in plugging the deficit without the much-needed incentive measures in the private sector to stimulate the economy and grow the tax base.