Finance Minister Malusi Gigaba has warned against government borrowing money "irresponsibly". Picture: Phando Jikelo/African News Agency/ANA
JOHANNESBURG - In a move to reduce budget deficit from the current 4.3 percent to 3.5 percent in 2020/21, the government wants to raise R36 billion in tax through, among others a 1 percent increase in Value Added Tax (VAT) to 15 percent, National Treasury said yesterday.

The new tax measures, alongside expenditure cuts, will reduce the budget deficit and fund fee-free higher education and training. Over the next three years, the government will allocate R57 billion for fee-free hugher education and training.

The VAT increase will account for R22.9bn of the R36bn revenue. R6.8bn would be raised from adjustments to personal income tax rebates, Treasury said. On the other hand, the personal income tax burden had been steadily increasing since 2010/11.

The government last year introduced a new personal income tax bracket of 45 percent for taxable income above R1.5 million.

Until now, the government has resisted the urge to hike VAT amid concerns, especially from trade unions, that doing so would hurt low-income households. But Treasury yesterday said the 1 percent VAT hike was less harmful to economic growth than raising other taxes. The Department said increasing VAT was the least damaging to economic growth and employment prospects.

"Unlike other major taxes, the VAT rate has remained unchanged since 1993 and is lower than the average rate across peer countries. The zero-rating of basic foods and paraffin limits the regressivity of VAT and additional adjustments are proposed to enhance the regressivity of the tax system. Above-inflation increases to social grants will also help cushion low-income households from the effects of the the VAT increase," Treasury said.

This year's tax proposals are consistent with the tone and approach set in last year's budget when Treasury said government could no longer defer increasing taxes in the face of accumulating public debt.

The tax increases are among significant changes the government has made to the fiscal framework in a move to stabilise the country's public finances. Treasury said increasing tax in a low growth environment was undesirable. "But the fiscal position is substantially weaker than it was at the time of the 2008 financial crisis, when South Africa had a gross debt-to-GDP ratio that was just above 26 percent. That ratio now stands at 53.3 percent. A failure to act now would lead to more drastic spending cuts and tax increases in future," Treasury said.

This year's tax increases indicate that government - which stuck in a low economic growth environment - will not hesitate to raise taxes in light of balooning government debt. Former Finance Minister Pravin Gordhan last year unveiled tax proposals which included increases totalling R28 billion.

The tax increases are in line with plans to narrow the budget deficit and containing the growth of public debt. According to Treasury, the measures stablise national debt as a share of Gross Domestic Product (GDP). South Africa expects a revenue shortfall of R48.2 billion in 2017/18.

South Africa raises tax in order to fund spending. When the budget is in deficit, the government is forced to borrow more, resulting in higher debt-service costs. In 2017/18, the government debt was R2.2 trillion or 50.7 percent of GDP.

In 2017/8, the debt-service costs amounted to R162bn and constituted the fastest growing element of the budget. In 2017/18, for every R1 collected in tax, 13c was diverted to service debt.

In the past government efforts to narrow the budget deficit have mainly centered around higher taxes and lowered expenditure ceiling. "Tax measures have primarily focused on personal income tax which, until recently, had proven to be a particularly buoyant source of revenue," Treasury said.

Treasury Deputy Director-General for Tax and Financial Sector Policy Ismail Momoniat yesterday said that increases in personal income tax had not had the desired impact in revenue collection. "In addition increases in personal income tax and corporate tax have bigger impacts on growth and employment," said Momoniat.

Other tax measures include a 52c a litre for fuel which is made up of a 22c a litre increase in general fuel levy and 30c a litre increase in the Road Accident Fund levy. Treasury said government would also introduce higher ad valorem excise duties for luxury goods as well as increases in the plastic bag levy, motor vehicle emissions tax abd the levy on incandescent light bulbs.

Addressing the media before the delivery of his speech, Gigaba yesterday said that government had taken a number of tough decisions and singled out the proposed VAT. He said, outside of government, there had been no consultations on the matter. "It is difficult to consult about tax before budget. It is necessary to take the decision and embark on consultation later. You need that level of decisiveness." said Gigaba.

Gigaba said the budget should be looked at totality. "Do not look at one or two items in the budget in isolation," he said. He said the higher education funding and steps to improve governance and finances of SOEs were among the budget's positive attributes.

Absa Asset Consulting acting head Kwaku Koranteng said, while there had been talks of VAT increases prior to the budget speech, "the across the board rise to 15 percent on all goods and services is somewhat of a surprise, but arguably the most effective way of raising revenue. It does mean however that general inflation will increase and the average consumers’ pockets will be hit the hardest."

Koranteng said the VAT increase had an unpopular social element because it had a bigger impact on the lower to middle income market, but said the increase was justifiable in addressing the fiscal gap.