Finance Minister Tito Mboweni will this week present what is arguably his most difficult and closely watched budget speech, against the backdrop of an already struggling economy decimated by the Covid-19 pandemic.
Some of the burning issues for the minister is whether he will increase personal income tax and introduce a wealth tax, as well as how he will provide for funding for Covid-19 vaccines and how the government plans to rebuild the economy and create jobs.
Mboweni is stuck between a rock and a hard place, Garth Rossiter, chief risk officer at small and medium-sized enterprises funding platform Lulalend, said.
He said the budget needs to focus on employment and creating an environment to support business growth, saying the biggest contributor to tax revenue was tax on individuals and then Value Added Tax (VAT).
‘A reduction in employment means you lose both of these… because people are not working and VAT; because they have less money and stop spending… There is already a strong sense that personal tax at 45% is about at its limit and by raising this, Mboweni risks killing the goose that lays the golden egg,’ Rossiter said.
He said a VAT hike would be more effective, but politically difficult as poorer families spend a greater share of their income on consumption and so it was unlikely to go up.
With all the financial obligations the government is facing, Discovery head of legal services Harry Joffe said increasing personal income tax was an obvious way to raise funds. He also reminded, however, that the mining sector performed well towards the end of last year.
He said this meant mining companies were able to pay more taxes, with the government collecting about R100 billion more than expected.
Is it time for a wealth tax?
“Taxpayers are hoping that this bounty will suffice in place of a rise in income tax, as many already feel overburdened,” Joffe said.
He said not only have wealth taxes been useless and abolished by many countries, there were also not so many rich people – those who earn $1 million (R15 million) of more – left in SA. There are about 35 000 high net-worth individuals in SA compared to around 3 million in the UK.
According to Joffe, wealth tax was also complex to implement as it was hard to determine what assets to include and exemptions to apply.
He said the government was more likely to use a stealth approach to increase tax collection rather than implementing an outright increase in personal income tax.
He said an example would be bracket creep, which happens when inflation pushes salaries into higher tax brackets, without the government adjusting the income tax brackets to match.
‘This means that everyone who gets an annual increase in line with inflation may unwittingly fall into a higher tax bracket than last year and so be charged a higher tax rate. Not adjusting tax brackets for inflation results in an automatic increase in tax revenue and most taxpayers won’t realise the impact on their earnings until much later. This would be the easiest way to collect more tax without overtly increasing taxes,’ Joffe said.
In light of the highly uncertain economic environment, Ester Ochse, product head of money management at First National Bank (FNB) said it had never been more important for consumers to pay special attention to the budget speech, as key decisions made by the Minister would impact on their growth and survival.
“Changes to personal income tax might reduce or increase the amount you receive on a monthly basis. Taxes imposed on liquor, tobacco and fuel will have a big effect depending on how much of your budget is spent on these items,” she said.