Matthew Lester: Budget Bets – VAT a last resort.

Finance Minister Pravin Gordhan will give what is most likely his toughest budget ever next week, as he battles credit rating agencies, slow growth and a bulging wage bill. And in the lead up, tax guru Matthew Lester will look at a few budget bets. In the first piece Lester looks at VAT as a means to help alleviate the strain. It’s an interesting piece as usual and unless Gordhan wants an outbreak of war between the government and unions, it’s likely he’ll leave VAT as is. – Stuart Lowman

By Matthew Lester*

Now that we are past SONA 2016 all eyes are on Finance Minister Pravin Gordhan. And its going to take something of biblical proportions to make much progress in the budget.

When it comes to budget predictions there will be many, mostly about tax . But the big ones are quite easy for anyone to predict. Because the options are so few.

Just to clear the air. The Davis Tax Committee does not participate directly in the lead up to the budget. Our work is published for all to see. So I have no advantage over the rest.

So lets say I was a betting man and was giving odds on the budget .

VAT increase? 10:1 against.

An increase in the VAT rate would signal that SA is hanging at the end of a rope. It must be the last resort.

A VAT increase would signal the start of outright war between the unions and the ANC. In an election year? Not likely.

Anyway, the first Davis Tax Committee VAT report states that although a VAT increase will have a lower impact on the economy than tax increases, it will have the highest impact on inequality. So the debate is actually a slam dunk.

Read also: Matthew Lester: VAT deficiencies – Pay now, Receive later

VAT zero rating extension of basic foodstuff? 8:1 against 

The popular misconception is that by extending the zero rating on basic food stuff the budget would be helping the poor. And the exemption already costs about R20 billion pa.

But research quoted in the Davis tax Committee reports is showing that the zero rating helps the rich as much as the poor. The poor by bread zero rated while the rich do the same with fillet steak.

Targeted intervention such as increasing the child and pension grants would achieve a lot more.

In all, if the situation is that desperate, national treasury has to make the call, increase the VAT rate or extend borrowings and risk the downgrade to junk status. The magic would be to find a way to avoid both.

• Rhodes University Professor Matthew Lester was educated at St Johns College, Wits and Rhodes universities. He is a chartered accountant who has worked at Deloitte, SARS and BDO Spencer Steward. A member of the Davis Tax Committee investigating the structure of aspects of the RSA tax system, he is based in Grahamstown.