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  • Little scope for higher taxes

Little scope for higher taxes

31 October 2019

On Wednesday 30 October 2019, Finance Minister Tito Mboweni presented his Medium Term Budget Policy Statement in extremely difficult fiscal circumstances. At the time of the National Budget in February 2019, the growth rate was forecast to be 1.7% for the 2019/20 fiscal year and the Minister has revised this to just 0.5%. This does not compare favourably with growth rates in the rest of sub-Saharan Africa. The estimate of the budget deficit for 2019/20 has been revised upwards, from 4.5% to 5.9% of GDP, while the debt to GDP ratio for the same period is also expected to be considerably worse, at 60.8% compared to 56.2%, ballooning to 71.3% in 2022/23. He also announced an estimated shortfall in tax collections of R52.5 billion for the 2019/20 fiscal year.

This state of affairs has a multiplicity of causes: in economic terms it is largely the result of an extremely sluggish economy, inefficiency in revenue collections by SARS and high government expenditure, particularly in relation to the public sector wage bill, state-owned entities and wasteful expenditure.

The Minister was at pains to point out that the Medium Term Budget Policy Statement is not the same as the National Budget presentation and, accordingly, the documents released contain little detail regarding the additional revenue measures that he stated as being necessary to stabilize the fiscal framework. However, the Statement does point out that, following several years of tax increases, revenue options are constrained. The tax-to-GDP ratio is approaching its 2007/08 peak of 26.4%. The 2019 National Budget included R10 billion in tax increases for 2020/21 and tax policy measures to raise this amount will be announced in the 2020 Budget.

It is widely recognized that the tax rates in South Africa are relatively high. The corporate tax rate of 28% is somewhat of an outlier if one compares it to, for example, the UK’s rate of 19%, proposed to drop to 17% from 2020 and the USA’s rate of 21%. Personal income tax rates are also high, with the top marginal rate of 45% reached at the equivalent of around $100 000 of annual taxable income. South Africa also has a thin band of personal income taxpayers: around 14 million (roughly 25% of the population) are registered with SARS and of those, only around 7.6 million pay any income tax at all. Of these, around 540 000 (less than 1 person in every 100 of the population) pay more than 50% of total income tax. Thus, the loss of high net worth individuals is especially detrimental to the fiscus.

It is therefore unlikely that we will see further increases in the rates of tax for individuals or corporates in next year’s Budget. It seems more likely that additional revenue will be raised by not fully adjusting for the effects of bracket creep and, possibly, further increases in the fuel levy. Despite the fact that the effects of increases in the fuel levy are similar to the effects of increases in the VAT rate, they avoid the political complications associated with the latter.

Rather than increasing taxes, government should focus its efforts on reducing expenditure, especially fruitless and wasteful expenditure and rebuilding revenue collection capacity at SARS. In simple terms, the fragile economy cannot sustain further tax hikes. It is encouraging to see that the Minister promised R1 billion to SARS for the next two years to bolster efforts to combat corruption and improve revenue collection. If this investment is effectively utilised, it should yield returns many times over.

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