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19 Feb 2016 00:00
The weakening Rand is one reason why economists predict that Finance Minister Pravin Gordhan will announce tax increases in his 2016 budget speech. (Reuters)
The widespread consensus is that Finance Minister Pravin Gordhan has no choice but to announce tax increases in his 2016 budget speech. Given that South Africa’s budget deficit is climbing unacceptably, that the rand continues to weaken and that the rating agencies have placed us on watch, the situation leaves him with no other choice.
Anyone reviewing their total pay-as-you-earn deductions from their payslip can testify that taxes are painful.
Any increase in tax will no doubt hurt South Africans, whether it takes the form of a rise in income tax, corporate tax or value-added tax.
But the taxpayers’ willingness to tolerate further increases is coming to an end and they are now expecting something in return.
Just as the Economic Freedom Fighters constantly calls for radical economic transformation, cooler heads in business and broader society need to call for a radical budget – the sort that includes brave spending cuts that have not been witnessed in recent years.
If it is acceptable for taxpayers to get by on less, the government needs to show its willingness to do the same.
During his brief tenure, former finance minister Nhlanhla Nene began to trim the rolls of fat by reducing government departments’ catering and travel budgets.
In last week’s State of the Nation address, President Jacob Zuma said this cost-cutting would continue, with even the need for two capitals coming under scrutiny. But Gordhan will have to go further.
Radical economic budgeting
Unfortunately, these kinds of cuts are insufficient to remedy our budget problems. New moves to act against corruption will similarly fall short because success will not be easy. For taxpayers (and the ratings agencies) to be satisfied, serious and immediate cuts are required.
With immediate effect, job positions in the government will have to be frozen. In a country with unacceptably high levels of unemployment and in which the government is the largest employer, this will not be universally well received.
But the small tax base can no longer afford to carry the weight. To delay cuts even further will only require more radical decisions down the road.
Public-sector bonuses should be cut, especially where the bonus has become an implicit entitlement. Those in the public sector need to bear the same pain as the rest of the economy. Nor can wage increases be disguised as promotions. The budgets of some departments, specifically those not essential for economic growth and sustainable job creation, may have to suffer the knife.
If such a budget is enacted, it may well ward off a ratings downgrade, at least for the time being. In the long run, a budget that serves South Africa’s future needs to go further. Hence, other than the cuts, remaining resources must be shifted to promote inclusive growth. South Africa’s stalled economy needs to be repositioned to capitalise on global growth once this growth (hopefully) begins to accelerate.
For a country that needs radical economic budgeting to take place, there could perhaps not be a worse time to table such a budget. Our political challenges are well known. By all appearances, Gordhan appears committed. The question is whether his Cabinet colleagues will go along.
But in a country that walked back from the brink of a far bleaker oblivion some 20 years before, we have a history of taking radical action in the nick of time. Let us hope that those in power have the conviction to act in line with this noble tradition.
Keith Engel is chief executive of the South African Institute for Tax Professionals.
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