Budget: Uncertainty remains over the nature of tax adjustments
We can expect the minister to present a fiscally prudent budget that admits the need to appease the concerns of nervous investors, but without bludgeoning a fragile and hesitant economic recovery to death.
This is the insight by Professor André Roux, economist at the University of Stellenbosch Business School ahead of Minister Pravin Gordhan delivering the national budget speech on Wednesday.
Reflecting on the calls for some for an expansionary budget, while others calls for fiscal austerity, Roux said somewhere between these two extremes is the call for fiscal prudence. He takes into consideration the very real predicament facing millions of South Africans – poverty, unemployment, and disillusionment.
“The challenge remains to budget for a modest increase in public spending that favours the poor, without raising the public debt to a level that would trigger a credit downgrade,” said Roux.
“In actual fact, we know from the 2016 medium-term budget statement that the bulk of the increase in government spending this year (an estimated R28bn) is to be financed from tax adjustments.
“With modest economic growth, organic growth in tax collections will also be modest.”
Roux said that what we do not know is the nature of these tax adjustments.
“The usual increase in ‘sin tax’ rates, and the proposed controversial sugar tax will not be sufficient.
“The most efficient mechanism would be a one percentage point increase in the VAT rate, which could yield an additional R15bn to R20bn.
“This idea has, however, been met with insurmountable political resistance over the last two decades, even though the burden on the poor could be relieved by, for instance, raising social grants and/or expanding the range of essential goods that are taxed at 0 per cent.
“Failing this, the brunt of the higher tax burden is bound to fall on the private sector – specifically through a lifting of the maximum marginal rates of tax on personal income, and possibly the introduction of a ‘wealth tax’.
“Higher corporate tax rates might also be considered.
“Other ‘headline’ issues that need to be addressed include the ownership structure of state-owned enterprises, the nuclear energy deal, the potential of savings by clamping down on mismanagement, wastage, and inefficiencies within and by the public sector, and the financial predicament of many of our university students (and universities).
“The elephant in the room is the future of Minister Gordhan. If he should be removed from office after the budget speech, then very few, if any, of the positive sentiments expressed above will come to fruition.”
