The fear of the increase in tax is justified if one looks at the limited options that the government has with low economic output and the resultant low revenue. Photo: File
The fear of the increase in tax is justified if one looks at the limited options that the government has with low economic output and the resultant low revenue. Photo: File

Finding solace after the storm - South Africa's 2021 budget options

By Opinion Time of article published Feb 19, 2021

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Tendani Mantshimuli

THE MOST pertinent question from the ordinary South African is, will the minister increase our taxes? The fear of the increase in tax is justified if one looks at the limited options that the government has with low economic output and the resultant low revenue.

Although not a popular option, and politically charged, the plain fact is the government might have to increase the rate of value-added tax (VAT). Consumer confidence and household incomes are at historic low levels, so this would not help consumer spending. Consumption expenditure is a substantial contributor to gross domestic product (GDP), so it matters.

Personal income tax thresholds in South Africa are at the high end and the tax base is quite small. This will have shrunk even further with retrenchments and salary cuts that have been implemented to keep companies going.

Options other than tax

Squeezing the tax base further is something that should be a last resort. Perhaps one avenue the minister needs to look at other than reducing government expenditure is to reduce the drain from the system through corruption and wastage by government departments.

Higher tax rates will bolster revenue that the government needs to finance the necessary expenditure without incurring debt, as well as servicing existing debt.

On the other hand, if both corporate tax and personal tax go up, it means that corporates will spend less on investment, and at-risk businesses it will cut back on their labour force. It will also put pressure on consumers’ disposable income and spending. VAT is a regressive tax, so lower income and vulnerable households will be more negatively impacted through items that are not zero-rated.

There are some positives consumers can expect:

There won’t be much to look forward to in terms of tax relief, so the best news would be no increase for high-income earners. There will be some relief for low-income earners through the normal bracket creep compensation.

We normally expect some tax incentive on savings, which would be great, because the country needs all the savings we can muster.

Most importantly, disciplined fiscal policy and execution on the restructuring of the economy will benefit households by stimulating growth and creating jobs and security.

Broadly speaking, we always talk about the budget taking place against a backdrop of tough economic conditions; none of us can recall when last these words were so apt.

This all takes place when the global economy is forecast to have shrunk by -3.5 percent last year. It is projected to grow by 5.5 percent this year. The South African economy, on the other hand, will shrink by -7.1 percent last year and recover to 3.6percent this year. Although the growth rate is good news, the output level is likely not to be at the same level as that of 2019, which means base effects are coming into play. Both the government and the private sector have not spent as much on investment as they did in 2019, because of low confidence and disruptions to the normal business cycle as a result of the Covid-19-related lockdowns.

Dealing with debt

In the 2020 budget, government debt levels were projected to come down steadily over time. We now know that this will not be the case. The minister is more likely to announce even higher debt levels than were projected during the special budget in October last year. With high debt levels come higher debt servicing costs which further reduce revenue that could be spent elsewhere.

Bringing balance to the economy

The minister’s speech on Wednesday will hopefully bring some clarity to what steps the government plans on taking to address the key issues facing the economy.

The balance that the government will be forced to strike against this is to reduce expenditure, which will include proposals to reduce the government’s wage bill. This has never proved easy to implement in practice. The October proposals to lower the salary bill must still be implemented. As mentioned earlier, this type of medicine is far from popular.

Tendani Mantshimuli is an economist at Liberty

*The views expressed here are not necessarily those of IOL or of title sites

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