Free tertiary education, NHI ‘not affordable’

Appropriate tax policy responses in the spotlight after downgrade.

South Africa cannot afford free tertiary education or a national health insurance given its precarious fiscal position.

Moreover, the introduction thereof would signal a shift in tax policy, a tax expert has warned.

Professor Emil Brincker, director and national head of Cliffe Dekker Hofmeyr’s tax and exchange control practice, says tax proposals in the post-Gordhan era did not signal any significant changes in tax policy, but were attempts to address short-term concerns like the budget deficit.

“I think where it will have an impact is if they introduce the free tertiary education. There you will have to collect a significant amount [of tax] and then also secondly the National Health Insurance, if they introduce that.

“At this stage South Africa cannot afford either of them because we don’t have the monies, but if they introduce that that will definitely have a significant impact upon the policy that existed to date.”

His comments come after S&P Global Ratings cut the country’s local currency rating to non-investment grade on Friday. Moody’s kept the rating unchanged one notch above junk, but put the rating on review for downgrade. The downgrade will make it more expensive for government to borrow, put pressure on an already constrained budget and raises new questions about the affordability of big ticket items. The vast amounts of money needed to fund large projects will likely require additional tax revenues, even on top of the funds required to plug existing holes.

Following the release of the Medium-Term Budget Policy Statement, which showed that tax revenue was expected to fall almost R51 billion short of earlier estimates, tax commentators have warned that South Africa may have reached a point where further tax hikes would not necessarily result in proportionately higher tax revenue. There is also a risk that tax increases could impede economic growth even further.

A statement issued on Monday appears to acknowledge that President Jacob Zuma’s ambitious plan for free tertiary education was not realistic in the current environment.

“President Zuma has directed that technical discussions of the Presidential Fiscal Committee take place, led by Minister Gigaba and the National Treasury, to focus on four areas, with a view to the proposals that emanate from this process being considered through the budget structures in preparation for the 2018 Budget,” the Presidency said.

One of the areas is the development of a phased-implementation plan to enable the proposal for fee-free higher education for students from poor and working-class backgrounds, which would be implemented “in a fiscally-sustainable manner”.

Michael Sachs, the head of the Treasury’s budget office, resigned earlier in November, reportedly after Zuma interfered in the budgeting process in order to fund free tertiary education.

A report previously released by the Davis Tax Committee (DTC), said it was too early to make explicit recommendations about a proposed funding mechanism for the NHI and that the large degree of uncertainty and lack of understanding of how the system would work were of concern.

The DTC also warned that the proposed NHI was unlikely to be sustainable unless there was sustained economic growth.

“The magnitudes of the proposed NHI fiscal requirement are so large that they might require trade-offs with other laudable NDP programmes such as expansion of access to post school education or social security reform.”

Brincker says following the downgrade, taxpayers can expect an emphasis on collection efforts by the South African Revenue Service (Sars), which could manifest in an increasing number of tax audits. Additionally, tax hikes are probably also on the cards in February.

Gigaba recently announced an inquiry into tax administration and governance at Sars, to help assess the factors responsible for the under-collection.

Brincker says government rather has to focus on efforts to stimulate the economy as opposed to the collection process.

“To a large extent the problem is because of the downturn in the economy.”

He argues that the downgrade has added to the country’s economic woes, highlighting the need for an appropriate tax policy response.

“With the downgrade, you are going to see disinvestment. You are going to see a slowdown in the economy, which was already the case. So everything is really counting against us. I think from a tax perspective and a tax policy perspective [we] have a number of significant decisions that we need to make.”

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