/ 16 February 2022

Death or taxes: Why the basic income grant is a tough sell

State Of The Nation Address 2022 At Cape Town City Hall In South Africa
Finance Minister Enoch Godongwana has some difficult accounting to do. (Jeffrey Abrahams/Gallo Images via Getty Images)

President Cyril Ramaphosa has announced the extension of the R350 grant in a move that has, in effect, bought the ANC government another year until it has to make a call on expanding income support.

The announcement also means that Finance Minister Enoch Godongwana can focus on reigning in spending for another year before being forced to raise taxes to make a basic income grant (BIG) possible.

The grant, and the trade-offs needed to finance it, could be a tough sell to a small tax base — which may have been more amenable to tax hikes when the government seemed better prepared to deliver on its promises.

Delivering his State of the Nation address (Sona) last Thursday night, Ramaphosa acknowledged that extending the R350 grant for another year, and the possibility of it becoming a permanent feature of South Africa’s social support system, would likely burden the country’s already strained fiscus. 

“As much as it has had a substantial impact, we must recognise that we face extreme fiscal constraints. A fiscal crisis would hurt the poor worst of all through the deterioration of the basic services on which they rely,” he said.

Any future support, Ramaphosa added, “must pass the test of affordability and must not come at the expense of basic services or at the risk of unsustainable spending”.

Not the time for tax hikes

The treasury and members of the presidential economic advisory council have pointed out that any permanent expansion of social grants must be backed by structural increases in taxation. Without raising taxes, South Africa’s budget deficit will widen and send the country deeper into debt. 

Economists have warned that the tax base will not be able to shoulder the burden of higher rates, which could also put a damper on the country’s already sluggish economic growth.

But it is likely that taxpayers don’t have to worry about higher taxes just yet. As Godongwana gets ready to deliver his maiden budget speech next week — having tabled his first medium-term budget policy statement last November — economists are not anticipating any increases in corporate, personal or value-added tax, saying the hikes would only unnecessarily burden the country’s small tax base. 

Investec chief economist Annabel Bishop said in her preview of next week’s speech that the budget will likely not be growth negative overall from a tax perspective. 

“Indeed, South Africa will likely see the same event for the 2021-22 fiscal year, as occurred for 2020-21, where larger than expected revenue collections meant meaningful tax increases for the following year could be avoided,” she said.

The medium-term budget last November noted that the gross tax revenue estimate for 2021-22 financial year was revised up by R120.3-billion compared with the projection in the 2021 budget. 

This improved outlook was the result of better-than-expected collections in the final quarter of 2020-21, upward revisions to economic growth and strong income tax collections, especially from the private sector. 

Isaah Mhlanga, the chief economist at Alexander Forbes, agreed that it is unlikely the minister will announce any direct tax hikes, especially with businesses and the public still reeling from the pandemic.

“I doubt that now would be the ideal time to increase corporate income tax … It would push businesses away from investing in South Africa, so I don’t think they will even consider that.”

Casting a wider net

If the treasury is planning on raising tax revenue, Mhlanga said, this would likely happen through a wealth tax, or by removing tax breaks on retirement savings. “That would be something I would expect; not by raising personal income tax or corporate income tax directly. In the current environment, that would not make sense.”

Deloitte’s tax director, Musa Manyathi, said: “If you look where we are now in terms of taxes, any tax increases are more likely to harm the economy, rather than positively contributing to the economy. So what we need now is economic growth, not tax increases.”

Manyathi noted that, if the state is considering expanded income support through higher revenue collections, the South African Revenue Service (Sars) must be able to broaden its tax-collecting capacity. 

“I think that is going to be more important — the ability of Sars to do targeted transactions, to ensure they can deal with tax avoidance and to enforce compliance. All of that has a positive effect on tax collections.”

The treasury’s medium-term budget document noted that strong economic growth, “coupled with greater efficiency in revenue collection, is needed to raise the tax-to-GDP ratio over the medium term”.

The government can raise revenue without necessarily having to raise taxes, Manyathi added. “If you enforce compliance, you are essentially bringing all the bad guys who are not paying their taxes into the tax net … That is where the focus should be right now. That is what Sars and the treasury should be thinking about.”

Compliance could become a problem if taxes are eventually hiked and the tax base continues to feel that revenue is being squandered. “There is absolutely a correlation between tax morality and how taxes are being used,” Manyathi said.

In its strategic plan for 2020 to 2024, Sars listed regaining public trust and improving tax morality among its goals. “But they are going to struggle to do that if there is a perception that corruption is robbing us,” Manyathi said.

In taxes we trust

Roshelle Ramfol, a lecturer at the University of South Africa’s department of taxation, noted that raising taxes is fine in countries in which taxpayers receive a lot in return. “In South Africa, I don’t think it is an issue of people not wanting to pay taxes,” Ramfol said.

“It is the way that the money is spent that becomes problematic. There is some distrust in the government’s ability to provide services to the general public. South Africa has high tax rates, but there are other countries with much higher taxes. The difference between South Africa and those other countries is that those people feel the benefits from their tax money.”

What needs to happen before taxes are hiked, Ramfol said, is for the government to restore public trust in how it spends revenue. “Whether it may be that I benefit from it, or you benefit from it, or whomever it may be, you want to know that taxes are being applied to the purposes they are required for,” she added.

“Until such a time that that trust has been built in government, you may always have some dissent and even a revolt in response to an increase in taxes.”

In his Sona, Ramaphosa underlined — as he has done so in the past — the importance of a social compact: “We are rebuilding the state and restoring trust and pride in public institutions.”

“If there is one thing we all agree on, it is that the present situation, of deep poverty, unemployment and inequality, is unacceptable and unsustainable … There is a need both to address the immediate crisis and to create conditions for long-lasting stability and development. To achieve this, South Africa needs a new consensus,” he said.

In a paper published early last week, Michael Sachs, an adjunct professor at the University of the Witwatersrand and a former head of treasury’s budget office, noted that the president “frequently waxes lyrical about social compacting and the need for government to be generous to its people, especially the poor and unemployed”. 

Trade-offs

But, Sachs said, Ramaphosa “has been largely silent on the question of the trade-offs, or the real economic concessions needed to make a social compact work”.

Speaking to the Mail & Guardian, Sachs said there is concern that the government will alienate the tax base by raising taxes to create the fiscal room for a basic income grant.

“It would be nice if you could conduct politics on the basis of, ‘I’m not going to do what people like and I’m never going to do what people don’t like.’ But to get what you want, to do something nice, you have to do something not nice,” Sachs said.

“So if you want to do a basic income grant, that is nice, but then you have to face the consequences … So, the point for me is that — if you are not able to face that trade-off — then you are taking us down a path that will eventually lead to bankruptcy.”

Ideologically, Sachs added, it is harder to mobilise the population behind higher taxes when the quality of public spending is poor. “To extract resources from the affluent, you need a social compact. You need to be able to appeal in a way that maybe tries to offset some of that.”

It may have been easier to justify a tax hike 20 years ago, Sachs said. In the early 2000s, South Africa was at the beginning of an economic boom, which lasted for about a decade.

“Over that period, from about 2002, we significantly increased expenditure and we reduced taxes. And we were happy with ourselves. If we had been more cautious about increasing expenditure at that time and not reduced taxes — and maybe even increased taxes — then we may have avoided the chronic fiscal position we are now in,” Sachs said.

“And then we may not have found ourselves in such a bad position when Covid hit. We would have more space to manoeuvre and raise spending.” 

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