Budget 2021: Why Tito Mboweni should not hike tax
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By Dennis George
Finance Minister Tito Mboweni will deliver the budget speech within the context that gross domestic product (GDP) has declined by 3.6 percent in 2020, and won’t recover even by 2024 as a result of the pandemic.
Tax revenues will also deteriorate because sectors such as textiles, glass products, footwear, education services, catering, and accommodation, tourism could not operate because of the hard lockdown. The tobacco and wine sectors that contribute towards sin taxes were severely impacted because the ban and restrictions on sales will affect tax revenues, while the black market for these products was thriving.
However, the health sector, the food, and agriculture sector, financial and insurance service sectors,and telecommunication services sectors were flourishing.
Small, medium and micro enterprises, and medium businesses in particular, face extreme pressure. Millions of jobs are at risk and millions of households are experiencing increased hardship. Tax revenue projections are down sharply.
As a result of procrastination and failure to introduce far-reaching economic reform measures, the government has forced sovereign rating agencies – S&P Global Ratings, Moody’s and Fitch – to downgrade the country’s investment status.
Credit ratings are imperative, as it is used by sovereign wealth funds, pension funds, and other investors to gauge the creditworthiness of South Africa, thus having a massive impact on the country's borrowing costs. Therefore, if debt does not stabilise, the government will be unable to borrow at affordable rates. This would in turn impede the ability of firms to invest and create jobs. It would also discourage households from making long-term financial commitments.
The public finances, which reached an unsustainable position before the pandemic, are now dangerously overstretched. Even though in October 2020, Mboweni announced in the Medium- Term Budget Policy Statement (MTBPS) implementation measures that will stabilise public debt, contain the budget deficit, fully restore economic activity to build confidence, increase investment and promote job creation. Policy certainty and confidence have not established themselves in the economy.
The impact of Covid-19-related shocks on revenue collection is expected to exceed that of the global financial crisis of 2008/09. Personal income taxes, corporate taxes, value-added tax (VAT), and customs revenue will be negatively affected by service and production closures during the lockdown, resulting in uncertainty, weak business, and consumer sentiment.
Companies of all sizes will be affected. The personal income taxes are under considerable pressure resulting from job losses, labour unavailability, and employers’ inability to pay full salaries. Salaries and wages will remain volatile through the recovery period. VAT and customs revenues will be lesser based on lower confidence, lockdown-related sales restrictions, and a much weaker trade outlook.
Lessons learnt from the Great Recession of 2008 underscore that fact income taxes are more volatile than consumption taxes, therefore, in 2010 VAT was down from its 2008 peak, while individual income taxes also declined and corporate income tax collections plummeted. It would not be a good idea for the Finance Minister to increase taxes during this period, the government should rather focus on cost cutting measures to support the economy through fiscal policy.
Dr Dennis George is the executive chairperson of African Quartz. He writes in his personal capacity.
*The views expressed here are not necessarily those of IOL or of title sites