Too many plans, little implementation harming SA’s economy

The Presidency and finance minister Malusi Gigaba this week issued statements about the urgency of addressing the challenges highlighted by rating agencies last week.

President Jacob Zuma has directed the Presidential Fiscal Committee and National Treasury to look at ways to cut expenditure worth about R25 billion and to identify “revenue-enhancing measures”, which should generate R15 billion.

The committee and Treasury have also been tasked with identifying “the package of economic stimulus measures” that will bring about faster economic growth.

S&P has lowered South Africa’s long-term foreign and local currency debt ratings because of “weak real nominal gross domestic product growth”. Moody’s has placed the debt ratings on a review for a downgrade because of recent developments, which suggest that the country’s challenges are “more pronounced than previously assumed”.

Gigaba announced in his Medium-Term Budget Policy Statement that there will be a potential revenue shortfall of almost R51 billion in the current tax year.

In his response to the issues raised by the rating agencies, he said additional spending cuts or tax increases of R40 billion would be required from the 2018-2019 fiscal year to stabilise state debt.

Kyle Mandy, head of national tax technical at PwC, says there certainly is not a lack of plans and ideas floating about. The problem is a lack of action to implement them.

If government took decisive action in relation to the 14-point growth plan, announced more than four months ago, it would have gone a long way towards easing concerns of the ratings agencies.

“The biggest concerns lie with a lack of progress in relation to economic plans and the issues that are not addressed at all. This includes the rigid labour market (including the ability to hire and fire, wages and skills) and the poor quality of basic education,” Mandy notes.

He says it will take cuts across all departments to achieve the R25 billion cut in expenditure. A good start would be to dramatically reign in the wage bill.

“Cuts should then be made to eliminate or significantly reduce expenditure on programmes that are not priorities or underperforming, and even possibly eliminate or merge entire departments.”

South Africans are already bracing themselves for tax increases in the form of a sugar tax, the scrapping of the zero-rating on fuel and threats of another increase in the marginal tax rate of individuals. The introduction of the carbon tax is also looming in the future.

Mandy says the sugar tax is unlikely to generate more than R2 billion. The scrapping of the zero-rating on petrol, diesel and paraffin could generate between R18 billion to R20 billion.

“However, it is unlikely that the removal of the zero-rating could be done without an accompanying reduction in the general fuel levy in order to mitigate the shock that such an increase would cause.”

Mandy says another increase in the individual marginal tax rate – already at 45% – is unlikely. There is already a strong sense that this is now as high as it can possibly go in the current economic and political environment.

“There are strong indicators that the large Personal Income Tax increases in recent years coupled with the decline in the economic and political environment have contributed to a decline in tax morality and compliance levels,” Mandy notes.

Des Kruger, tax consultant at Webber Wentzel and member of the VAT work group of the South African Institute of Tax Professionals, questions whether there has been a decline in VAT morality.

The VAT compliance rate is comparable to that found in most developed economies. “That is not to say that the continued abuse of taxpayer monies will not impact tax compliance, especially if Sars’ capability is compromised,” Kruger adds.

An increase in the VAT rate to 15% would bring in about R20 billion in additional revenue, according to Mandy. “However, a portion would need to be returned through expenditure or increased zero-rating of basic foodstuffs to compensate the poor and reduce the regressive effects.”

Kruger notes that the first interim Davis VAT Sub-Committee report concludes that raising the VAT rate will have an (albeit very small) negative impact on inequality, but will be much more efficient than an increase in direct taxes.

“It is also important to consider the longer run where increases in direct taxes dampen growth, which in turn leads to reductions in tax revenues and constrains the ability of the state to reduce inequality through the expenditure side of the budget,” he says.

Mandy adds that he would not be surprised if the tax rates for donations tax and estate duty were increased. However, the contribution from the increase will be minimal.

Mandy says in the current economic environment South Africa simply cannot afford nuclear energy, fee-free higher education or the National Health Insurance plan.

Read: Free tertiary education, NHI ‘not affordable’

“Announcements to close the R40 billion gap to keep the debt levels below 60%, without measures to improve growth, could very well be self-defeating. It could actually harm growth while also reducing tax revenues, as we have seen in the last two years,” Mandy warns.

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