Like me you might have heaved a sigh of relief when the Finance Minister, during a long speech, announced there would be no increase in personal tax.
Like me you might have heaved a sigh of relief when the Finance Minister, during a long speech, announced there would be no increase in personal tax.
Only a bit later the thought occurred to me that I should enjoy it while it lasted. In a sense, Pravin Gordhan, who seemed to me confident and relaxed while reading his Budget speech yesterday (Wednesday), was delaying the inevitable.
I don’t think we all appreciate just what a tight spot he was in. Certainly the trade union voices that at this time of year call for higher taxes on the rich appear not to sympathise with the Finance Minister’s plight in trying achieve the delicate balance of a budget that pleases or displeases most people, but not too much.
The temptation to find the missing billions the Treasury needs by increasing personal income tax by raising the top or ‘marginal’ tax rate must have been high.
He has already indulged a bit of ‘stealth tax’ or ‘bracket creep’ by not adjusting the tax bracket thresholds fully to account for inflation-related wage increases. This means some taxpayers are going to pay more simply because inflation has moved their salaries into a higher tax bracket.
There are three things the Finance Minister can do when faced with a bigger gap between tax revenue and spending than expected. Much like our household budgets, spending can be cut, revenue can be increased or more money can be borrowed.
Pravin Gordhan is already cutting spending in the next three years by more than R10-billion. Slashing spending more, especially in South Africa’s low-growth economy, would be self-defeating because it would deal a further blow to economic growth. And it means government cannot fulfil its promises to provide for the poor.
There is a limit to how much the South African government can borrow to close the gap between revenue and spending, the ‘budget deficit’, for two reasons.
Firstly, this is a responsible government that does not want to be caught in a debt trap we can get out of with great difficulty, like all those people who have racked up debt to such a level that they end up borrowing more to pay debt instalments in a downward spiral to bankruptcy.
Another reason is the extent of the budget deficit is one of the things the powerful credit-rating agencies look at when deciding how credit-worthy we are. If they give a thumbs-down signal to the world about us, we pay more for debt. The budget deficit for this past year at 5.2% is at an uncomfortable level.
So it’s tax increases, and we will be paying more in fuel tax and the taxes on alcohol and tobacco, among other things, this coming year, and the Treasury has budgeted for a 10% increase in tax revenue overall, higher than the Reserve Bank’s upper target for inflation of 6%.
The government has three main sources of tax: VAT, personal income tax, and company tax. Together they make up around 80% of tax revenue this year. The shares are as follows:
Tax | R-million | Percent |
Income tax | R 274 020 | 34% |
Company tax | R 156 350 | 19% |
VAT | R 217 000 | 27% |
Other | R 162 780 | 20% |
Why not raise the company tax rate? The reason is that South Africa is desperate to entice companies to invest in productive capacity that creates jobs and contributes to the wealth of the country. Not desperate enough to countenance low-wage jobs, apparently, but certainly desperate enough not to consider raising the company tax rate. In fact, what the Treasury has planned is making it easier for small businesses to pay even less tax than big businesses. Small businesses pay 7% if they have a turnover between around R67 000 and R365 00, and 21% between R365 000 and R550 000.
Why not raise VAT? VAT is an efficient tax that is hard to avoid or evade; at a reasonably low rate of 14% it would be easy to round it off to 15%; and it could bring in many billions of rand at the stroke of a pen. The argument is that it is regressive i.e. it hurts the rich and the poor equally, though some of this sting can be taken out by zero-rating or excluding items, as is done with certain foods already. However, the major trade union federation, Cosatu, which is an alliance partner of the ANC, will fight hard against any VAT increase. The Finance Minister would have to make a strong argument to counter trade union objections to a VAT increase. Perhaps he could raise income tax at the same time.
That leaves personal income tax and either using ‘bracket creep’ or actually raising the top marginal rate from its present 40% for those earning more than R638 600 to, say, 45%. Presumably this would entail adjusting the marginal rates below this sum as well so that those who now have a top marginal rate of 38% would move up to 40% etc.
The problem is that increasing the contribution of the six-million citizens to the individual income tax pool won’t bring in much more revenue without quite stiff increases in the marginal rate, much higher than 45%. Punitive tax increases have consequences too. They could encourage tax evasion or mobilise richer citizens to more actively oppose the present government, or even lead to a tax revolt.
This year R7-billion was given back to taxpayers to offset some of the effects of inflation on the tax we pay as individuals. The Treasury is nonetheless planning to extract in total around 12% more in income tax from individuals this coming year. It plans to raise 12% more in VAT, and 9% more from company tax. Part of that will come from bracket creep. For this coming fiscal year the tax bracket thresholds have only been increased by 3.5% rather than the 5.7% inflation rate the Treasury estimates for 2012.
The past few years should have taught us that we live in volatile economic times and that South Africa is very much integrated into the world economy. Moreover, we are sharply affected by what happens in the major markets of the US and Europe. Growth is anaemic in the US and Europe. What happens when we have another hole in the budget? Do we ditch the funding of major public projects, specifically the National Health Insurance scheme? Do we cut back on the social grants that are the only welfare net for millions of people?
I think the answer is quite clear. The Minister is just kicking the can down the road. Gordhan has been frank in pointing out the National Health Insurance project cannot be funded without a tax increase, and he has promised a review of the tax regime. Unless the world economy stages a dramatic recovery, and company profits are not dented by domestic unrest as they were last year, there will be tax increases within the next three fiscal years, quite possibly, for the sake of equity, in both personal income tax and VAT.
