Many factors complicate the job of Finance Minister Tito Mboweni— from juggling politicians to placating the ratings agencies watching the treasury’s every move — and pressure is mounting on the minister to stabilise the country’s shaky economy.
Next week Mboweni will deliver the first budget speech of the country’s sixth administration amid shrinking gross domestic product figures, rising unemployment and a high public wage bill that is adding further strain to the ailing government coffers.
But two of Mboweni’s biggest problems are more enduring: the country’s tax revenue collection is stubbornly low and the public sector wage bill should be urgently reduced to improve the fiscal situation.
Simply put, the government needs to collect more tax and to allocate it more efficiently. Additionally, urgent structural reforms are necessary in the form of reduced spending to restore confidence in the government’s ability to fix the economy.
Tax revenue projections were revised down by 4% over the medium term. Mboweni said in the medium-term budget policy statement that the South African Revenue Service (Sars) expects to collect R1.37-trillion this year, which is R53-billion less than expected.
“The conundrum facing the minister is whether to increase taxes,” said Deloitte managing director Delia Ndlovu. She said that Mboweni has very little room to manoeuvre when it comes to increasing taxes.
First, at 28%, the country’s corporate income tax is higher than the global average, Ndlovu said.
“Increasing personal income tax will put a strain on consumers that are already feeling the pressure of a depressed economy. Increasing VAT [value-added tax] could have some political backlash,” she said. “Therefore, we believe the minister’s options to increase tax are limited.”
Peter Worthington, a senior microeconomist at Absa, said the public should expect tax hikes, one possibly being the increase of VAT by one percentage point, from 15% to 16%, although he cautioned that this is not a foregone conclusion.
Peter Attard Montalto, emerging markets economist at research firm Intellidex, said his firm believes that restrained bracket creep — which is not moving tax brackets in line with inflation — will be the principle way raising more money on the tax front. Intellidex estimates this will raise about R13.7-billion in the coming fiscal year.
He said this form of tax intervention is far more progressive than a VAT hike and can be made more so by raising the tax-free threshold. Montalto said this measure is “hidden” and less dramatic than VAT.
However, Montalto said the treasury will be cautious when increasing taxes. “They worry that hiking taxes meaningfully would tip them over and screw with the rest of the revenue they are raising.”
This proposal might not be a concern for the treasury. Earlier this month, Mboweni took to Twitter to suggest that churches — which are tax exempt — be made to pay taxes. Although the minister’s tongue-in-cheek tweets do not qualify as an official government stance, they do indicate that the government may be looking for additional sources of tax revenue for its strained coffers.
Tertius Troost, tax manager at Mazars said that there are a number of laws that already apply to religious institutions and that better policing of these laws could be a solution.
“Religious institutions are required to register with the Sars tax exemption unit as a public benefit organisation [PBO] before it can claim the relief that comes along with being a PBO.
“Sars should make sure that all of the existing tax legislation directed at religious institutions and their employees are followed, and that everyone that is liable to pay tax is indeed paying their fair share.”
In his State of the Nation address last week, President Cyril Ramaphosa said he is involved in talks with unions and relevant stakeholders about cutting the public wage bill, which accounts for 35.4% of national spending. But Worthington said big cuts are not likely to happen this year.
“I do not think they will be able to cut the wage bill this year because the unions have already said the current wage bill is sacrosanct and they will not have any alteration to the terms of the current wage deal,” said Worthington.
“It’s really going to be very interesting to see where exactly we can cut overall expenditure. I am not clear we can deliver an awful lot on that this year,” he added.
Regarding Eskom, Montalto said there will not be any substantial interventions on a debt solution because Cosatu’s position paper has not been approved. The trade union federation proposed in January that the government use public servants’ pension funds to bail out Eskom. This will be done by creating a special-purpose vehicle to house as much as R250-billion to assist the power utility.
But the Government Employees Pension Fund, which is the continent’s largest pension fund, said it will not invest in Eskom if it does not meet its criteria.
Thando Maeko and Tshegofatso Mathe are Adamela Trust business reporters at the Mail & Guardian