Stout captain but stiffer headwinds

The biggest hospital pass in tax history must have been when Pravin Gordhan took over from Trevor Manuel as minister of finance in May 2009.

Manuel had it easy — growth rates of more than 4% a year and a broadening tax base contributed to an annual growth in tax collections of 12%. At times South Africa had no need to borrow.

Gordhan has soldiered on for the past four years with reduced growth rates resulting in an 8% a year increase in tax collections. The result: a frightening increase in the national debt trajectory.

South Africa’s budget remains heavily dependent on three taxes: personal tax, company tax and VAT, which contribute more than 80% of the total tax collection. That was fine in good times, but now a third of South African companies are in assessed loss. With a small tax base, the increase of personal tax rates is not a solution, and looming elections rule out a VAT rate increase.

In good times, it was possible to increase social security benefits for all South Africans, funded by the big three taxes. Perhaps in harder times a fourth tax, in most countries a social security tax, is needed to balance the books.

The only new tax scheduled is carbon emission tax, effective January 1 2015. And a mountain of questions need to be answered before that becomes a reality.

This week, the South African Revenue Service will release the annual tax statistics package and Gordhan will give his medium-term budget policy speech in parliament. In last year’s statement, he committed the Treasury to the objectives of the National Development Plan. The question now arises: How does one stimulate the growth rates required by the plan if there is an insufficient tax base to fund the projects needed?

Then comes the issue of the national deficit. Are SARS collections for 2013-14 on track? The prolonged strike season, increased energy prices and decline in consumer confidence must have had an adverse effect on tax collections. Is it realistic to believe that South Africa can contain the national deficit from its current 5% of GDP to 3% by 2016? On the bright side, if there is one South African who can make it happen, it is Gordhan.

Originally published in the Sunday Times: Money & Careers Tax Talk column.


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