The world is changing fast and to keep up you need local knowledge with global context.
JOHANNESBURG — The 2018 budget speech next month will be much-watched by analysts, economists and political scientists. A lot could change by the time the speech rolls around: who knows, Gigaba may not be our finance minister by that stage. But regardless of who delivers the speech, the finance minister will have some serious challenges to tackle as the country’s debt levels soar and the tax base struggles. As Matthew Lester puts it, the only saving grace could lie in VAT increases. But VAT is a political hot potato in SA. – Gareth van Zyl
By Matthew Lester*
It seems that President Zuma will blunder on in an attempt to restore confidence in the SONA address. No doubt the EFF will do all that they can to reduce the occasion to chaos. So, South Africans will learn nothing about the future.
No matter who is president, minister of finance or SARS Commissioner; the national numbers will be the same at the national budget speech on 21 February 2018. A complete disaster! South Africa’s debt to GDP ratio will remain above 4%. And the question will remain: ‘What are we going to do about it?’
And if the Zuma announcement of free higher education is pursued that will worsen SA’s predicament by a further R40-R60bn pa.
Previous Finance minister Pravin Gordhan, always attempted to paint a picture that the debt to GDP ratio would improve.
Finance minister, Malusi Gigaba, is expected to come up with solutions. But the honest answer is that the South African tax base cannot support the current debt trajectory. The silver bullets, if there were any, are already spent.
There are simply not enough wealthy South Africans to make even a small dent in the mountain of debt. Even the new super tax bracket of 45% on taxable income above R1.5m, imposed from 1 March 2017, is only scheduled to collect additional R4bn from just 103 000 taxpayers.
This is not to say that there is no prospect of substantial personal tax increases. An increase in the supertax level is almost inevitable. The only questions are at what rate and at what level?
Personal tax increases will not be confined to the wealthy. Almost inevitably, the annual fiscal drag adjustment will be negligible resulting in an effective personal tax increase for almost all South African taxpayers. This may give Gigaba R12bn. This is not nearly enough to save the day.
Corporate tax collections are dependent on trading results and an increase in the headline rate will do little more than scare off investors.
The only new tax on the horizon is the controversial carbon tax. In 2015, the Davis Tax Committee reported that, in its opinion, the implications of carbon tax implementation have not been fully assessed. And not much has been heard since. It would be dangerous move.
Of course, an increase in the fuel levy is inevitable. But that’s not the end of the debate. In the February 2017 budget review it was announced that National Treasury was exploring the removal of the zero rating on fuel. Perhaps this is on the cards for 2018 instead of resorting to carbon tax.
No doubt, there will be a cocktail of smaller tax increases but they will have little consequences in the general scheme of things. South Africans cannot drink, drive and smoke enough to make a meaningful difference. Sugar tax will be implemented, but despite the sensation it won’t raise much.
In reality this leaves Gigaba with effectively two options
- Battle on with the current tax base and ignore the National debt trajectory, incurring the wrath of the ratings agencies. (Perhaps they will hold off with Ramaphosa on the horizon. Maybe not!)
- Tackle VAT!
Nearly all economists agree that a substantial increase in the South African VAT rate will have the least damaging effect on the economy in the long run. But in reality, the brunt of the increase will fall on the poorest of the poor.
Economists also agree that’s providing relief to the poor through general zero ratings on basic foodstuffs is a blunt form of intervention. The rich enjoy the concession just as much as the poor.
For years the pundits of a VAT increase have lost their bets on a general VAT increase. Why? Organised labour has drawn a line in the sand on the VAT rate. As the unions say, “Increase the VAT rate and we will make the student protests looked like a Sunday afternoon bring and braai!” With elections looming in 2019, it would be a very brave minister of finance who even mentions the word VAT in the national budget speech. So I am still not betting on a general VAT increase.
But there is more than one way to skin a cat. What about a multiple VAT rate system?
The Davis Tax Committee has dismissed multiple VAT rates. The concept is complicated and will disturb the simplicity that has always been the beauty of the South African VAT system. In any event, classical theory suggests that ‘ luxury taxes’ should be imposed through the excise system, resulting in both increased excise duty and VAT collections.
But classical theory has little place in political debate around taxes. If a general VAT increase is not possible, perhaps a multiple VAT rate can act as a very poor second-place.
The investor with a substantial Rand hedge already in place it’s probably best advised to sit tight. The downside on the Rand is still very real. And will remain so until after the 2019 elections, at least!
- Matthew Lester is an associate professor at the Rhodes Business School and a member of the Davis Tax Committee.