What will it take do you fix South Africa’s National debt crisis?

There was not much meat on the bone that was finance minister Malusi Gigaba’s medium term budget policy statement speech ‘MTBPS’ on 25 October 2017. To be fair, the MTBPS is not the place to even speculate as to the extent of tax increases that will be required in the national budget speech in February 2018.

Now taxpayers will have to spend the Christmas holidays in ‘ Bring and Braai’ mode, speculating of the tax increases to come.

Let’s add fuel to that fire.

National Treasury projects a revenue shortfall of R50.8 billion in 2017/18, if the position doesn’t worsen by February 2018. Remember that the final outcome is very dependent on tax collections over the festive season from bonuses and consumer expenditure and South Africans are not exactly in plain mode at the moment. In any event, the final shortfall will have two to be added to the budget deficit.

Based on the current tax base of South Africa the shortfall is estimated at R69.3 billion in 2018/19 and R89.4 billion in 2019/20. The consolidated budget deficit set to widen to 4.3 per cent of GDP in 2017/18.

Opening observations (1) something substantial has to be done and fast. Deficits of this size will reduce South Africa to financial ruin if they continue and (2) no amount of ‘tweaking’ of the current tax base will come anywhere near closing the gap.

In very rough numbers the following can be readily achieved

Personal tax increases

A massive personal tax hike could probably secure R20 billion. Such a hike would have to be spread across the entire personal tax base effecting all 6 million paying taxpayers and not just the 1 million earning more than R600,000 pa. Physical Dragon adjustments will have to wait and further supertax rates imposed.

There is been much debate around of the medical rebate and that it should be removed in order to finance the NHI program. Although the full NHI program install miles of implementation the medical rebate must be in the spotlight.

Fuel and Sin Tax

Alcohol and cigarettes get hammered every year. Perhaps an additional R3 billion could be raised. Not much more almost of South Africa will join the growing contraband trend.

There may be space for a fuel levy increase of as much as R5 billion. But watch out! Oil prices are rising and the exchange rate is weakening. So the effect of a fuel levy on the poor is a stark reality.

In budget 2017 National Treasury alluded to the possibility of removing the VAT Zero rating on fuel. That’s a possibility, but the effect on inflation would be disastrous.

Other

Many of the bullets applied in recent years are already spent. CGT and dividend tax increases have already been pushed to the limit.

National Treasury has yet to implement any of the suggestions made by the DTC regarding estate duty. Perhaps there is as much as R5 billion that could be recovered in this arena. Moves towards a wealth tax are been discussed, but they will never be ready before 2018.

Conclusion

Even with the mother of all national budget tax increases the gap can only be closed by about R30 billion. SA is only halfway there. Far more is needed.

Back in 2014 finance minister Nhanhla Nene tried to close the gap by splitting the burden evenly between tax increases and reducing state expenditure. The 2017 MTBPS shows little indication of how far finance minister Gigaba will go in this regard. Does he reduce state expenditure or make a massive move on the tax system?

Remember that there is no new form of taxation ready for implementation in 2018. Sugar tax is about the only new one and that will not collect more than R1 billion. National Treasury has looked at carbon tax but it is doubtful whether this could be implemented by 1 April 2018. It will probably take another year.

So, in reality, there is only one option: VAT.

Most economists would agree that a VAT increase is the only way to close the gap without destroying the economy. But that economists’ talk. Of far greater relevance are the political ramifications. Organized labour have drawn a line in the sand ‘ increase the VAT rate and we will make student protests look like a Sunday afternoon ‘bring and braai.’

It is interesting that Gigaba sees himself as a future leader of South Africa. If he could break the deadlock over the VAT rate that would indeed be great achievement. However, it will take much convincing and negotiation.

A VAT increase will inevitably be hardest felt by the poor and accredited research tells us that increasing the basket of zero rated foodstuff will make very little impact on that. If the VAT rate is to be increased it will have to be a massive increase of 2-3% and organized labour will have to be convinced that at least half of the increase Will be given back to the poorest South Africans by way of meaningful targeted interventions. But you try and sell that such a package to the poor, they simply won’t believe you.

So rumours abound that South Africa might turn to a variable VAT rate. This has always been dismissed as an option due to the enforcement problems. The very beauty of the South African VAT system is its simplicity. And we don’t want to change that, do we?

A solution may be to keep the VAT rate at 14% and impose massive duties on luxury items. This has the added benefit of collecting both the duty and the VAT on the duty. It gets complicated, particularly in international trade arrangements, but desperate times take a desperate measures.

Overall conclusion

The shortfall in tax connections is solvable. South Africa has the talent to rise to the occasion but it is going to have to take the participation of all to skin this cat. Gigaba cannot do it alone.

The return of growth rates and tax buoyancy would solve the problem very easily and in a very short time. Somehow South Africa’s business confidence has to return. That would change things enormously. But integral to the recovery of business confidence is to convince taxpayers that the money is being properly spent!

The current tax base is adequate for South Africa’s needs. If bribery, corruption, wasteful expenditure, and tax evasion could somehow be addressed there would be a better life for all South Africans.

It all comes down to ethics. Do those involved in bribery, corruption, wasteful expenditure and taxation realise that they are stealing from the poorest of the poor.

How do they sleep at night?