Finance Minister Nene needs to wring R44bn from an economy which is stuttering via “a structural increase in revenues”, writes Craig Dodds.
Something’s got to give, and it’s likely to be the taxpayer. As Finance Minister Nhlanhla Nene prepares to deliver his first full Budget on Wednesday and weighs the options available to him to make ends meet, some method of eking more out of the tax system will be high on the list.
He has already announced all the trimming of expenditure plans it is politically viable for him to do, for the moment, unless conditions change for the worse.
In his Medium-Term Budget Policy Statement in October, Nene said the government would be lowering the expenditure ceiling announced by his predecessor, Pravin Gordhan, for the medium term and would cut trimmings such as catering, travel, accommodation and advertising, while it froze vacant posts in the public service, to realise a reduction in planned expenditure of R25 billion over the next two years.
Though Nene emphasised expenditure would still grow in real terms, his first big play as finance minister drew a sharp response from the ANC’s alliance partner Cosatu, among others, which accused him of following the Eurozone down the path of austerity, with similar results – a protracted slump – likely to follow.
Nene also said any future bailouts of state-owned enterprises would be funded through the sale of non-strategic assets – which many interpreted as privatisation by a different name – another move likely to meet resistance.
So the minister was sticking his neck out in October and his speech on Wednesday will be watched to see if he has been able to hold the line on both these commitments.
On the spending side, the other big test will be the public sector wage talks.
Nene said any increase would have to be in line with inflation, but unions have yet to budge from their demand of 15 percent, despite a windfall drop in inflation expectations thanks to the oil price collapse.
That windfall also comes as a boon to Nene but it won’t compensate for missed revenue targets in the past financial year and ever-shrinking GDP growth forecasts, which also translate into the likelihood of less tax being collected.
Which brings us to tax.
Having cut spending as much as he dared, Nene said in October he would also need to find another R44bn in the medium term from a “structural increase in revenues”.
Given that the Davis Committee on Tax – tasked by Gordhan to examine whether the tax system was optimally serving the country’s needs – has already made some recommendations, we can expect Nene to say something about how he intends to wring that R44bn from a feeble economy. None of the options is especially pleasant.
The majority of personal income tax payers – those with jobs and earning above the minimum threshold, are already stretched thin by high levels of debt, minimal gains in earnings and, in many cases, an increased number of dependants thanks to high rates of joblessness.
At the top end of the spectrum are the small number of individuals who earn obscene amounts (relative to the rest), making them an attractive target politically, but even milking them fairly hard wouldn’t raise all the money Nene needs.
Research by Wits Economics Professor Jannie Rossouw and Fanie Joubert and Adele Breytenbach of Unisa has suggested the addition of two marginal tax brackets (45 percent for taxable income over R1m and 50 percent for taxable income over R2m), with a 1 percent increase in VAT (to 15 percent) and raising the company tax rate to 30 percent would yield an extra R44.7bn.
This is where Nene has to walk a fine line. Raising VAT would anger labour because it targets everyone, not just the rich. It might also cause embattled consumers to tighten their belts further – reducing the amount of VAT collected and crimping demand in an already limping economy. But squeezing companies and high-income earners too hard could cause them to revise their own spending plans, particularly investment, just when they are needed to pick up the slack.
Nene will have to weigh the potential impact on growth prospects of any new or increased tax against his need to balance the budget and meet his deficit reduction targets.
If he squeezes too hard and stalls growth even further, tax revenue will decrease anyway – defeating his purpose. But beyond the numbers there is another balancing act Nene, with his cabinet colleagues, will have to negotiate – maintaining the nation’s trust in the state to spend its money appropriately.
Of course there are some who never had any such faith, but they were always a minority. Most, with a few exceptions, have agreed to be taxed and diligently filed their returns because they were convinced of either the fairness or the inevitability of the system.
The level of voluntary, as opposed to coerced, compliance was the fruit of painstaking efforts to modernise collection systems and maximise transparency, but that consent is coming into question.
The first question is around the integrity of the SA Revenue Service, along with, possibly, its operational capacity. Upheaval in the top management of Sars has opened the door to speculation that it is being manipulated to favour a connected few. Whether true or not, this is a potentially devastating perception to leave unchallenged because if the belief takes hold that some taxpayers are more equal than others there will be a powerful temptation on the part of the rest to try to buck the system.
That will place a greater burden on the enforcement arm of the service, putting strain on the very capacity that has just suffered a serious blow through the recent removal of key players.
A hitherto relatively stable institution like Sars would have built a pool of reserve experience that may be able to plug the hole fairly seamlessly, but the last thing Nene needs is for the tax collection capacity of the state to be stretched just when he is asking it to collect more taxes.
As the minister responsible for Sars, he should try to put these concerns to rest on Wednesday.
A second question relates to the capacity of the state to execute what it promises to do with the taxes it raises.
While President Jacob Zuma’s State of the Nation Address committed the state to an even more central role in getting the economy moving – including a greater role for state-owned companies – the evidence up to now is that it is quite bad at playing this role.
If Zuma’s State of the Nation Address is to be his cue, on the one hand, and he sticks to his commitment not to borrow any money to keep ailing parastatals afloat, on the other, Nene and, subsequently, his cabinet colleagues will have to spell out how they plan to fund an increased role for the state owned enterprises in igniting economic growth while spelling out credible reforms to the way in which they are run that will lead to greater efficiency.
Failing this, putting a greater burden on taxpayers (and that includes the jobless and poor, who pay VAT, among others) would be a politically toxic move in a country where daily examples of state incompetence are stretching their patience and credulity.
Political Bureau