Johannesburg, 23 February 2021 – As we head towards 2021 Budget Day, it is worth tracking back to 2020 Budget Day to evaluate where we were and where we can hope to be at the end of this year’s announcements. It is important to remember that even then, before the nationwide lockdown because of the COVID-19 pandemic, Minister of Finance, Tito Mboweni, advised us what a precarious state the South African economy was in, writes Prof Deborah Tickle CA(SA) Adjunct Associate Professor at UCT and member of the SAICA Southern Region Tax Committee.
Growth for 2019 was 0.3% and we were only expecting an increased growth to 0.9% for 2020, the State Owned Entities (SOE’s) were not improving and continued to guzzle money and the State’s salary and wage bill was predicted to swallow 11% of our taxes. We were facing the final downgrade to ‘junk’ from the ratings agencies. Simultaneously, South Africans continued to be ‘force-fed’ a never-ending litany of corruption stories dished up by the Zondo Commission. The Minister of Finance made it clear that there was not enough money and growth was not adequate, so borrowings would increase, and the public wage bill had to be reduced. In a nutshell, things looked bleak. He had mentioned zero based budgeting, but it had not happened.
Fast forward 12 months, the downgrade to junk happened and the COVID-19 pandemic hit hard. It wreaked havoc with the budget plans. What was bleak became crisis as Government had to lockdown, pay out unbudgeted costs for additional healthcare facilities, PPE and now vaccines, as well as provide additional grants to individuals (there were already 18 million people surviving on SASSA grants) and businesses. It also watched its tax revenues shrink (potentially by as much as R300 billion) as businesses came to a standstill or collapsed, jobs were lost (the net loss is now predicted at around 1 million) and taxes from alcohol and cigarettes had to be forfeited under the bans.
So where does this leave Treasury when looking forward to 2022?
‘Desperate times call for desperate measures’ and if there ever was a good time to zero-base budget, it is now. The world is operating very differently than it did a year ago. Operating digitally is commonplace; the already dire level of poverty in South Africa has increased dramatically and there is urgent need to address this to retain social cohesion. A bottom-up expenditure budget needs to reflect the ‘new normal’. Once the critical needs are determined, and only those needs, the income source needs can be established.
On the revenue side there are several options: Grow debt; increase taxes; sell public assets.
Debt service costs were estimated to be R229 billion in the 2020 budget. However, that was based on gross debt that amounted to around R3.5 trillion (69.1% of GDP). By September this had reached 75.2% of GDP (around R4 trillion). To put this in perspective R229 billion amounts to a cost of around R38000 per annum each for the (approximately) 6 million people who submit a tax return and pay some tax. Continuing to increase debt is thus not sustainable.
Selling public assets is an option and, when one considers some of the state-owned entities, this becomes a very important discussion. However, selling off other government assets may be a short-term solution with little long-term benefit.
Increasing taxes appears to be the preferred route as it levels the ‘pain’ at people or businesses that still have money in their pockets. Whilst the South African Revenue Service, which is being rebuilt by Commissioner, Edward Kieswetter, rightly strives to make sure all taxes owed are collected and that evaders are heavily punished and, based on current reports of cash collected over the December/January periods, it is succeeding, there are a few things regarding taxes that need to be put in perspective.
Firstly, tax revenue in 2020 was budgeted to amount to 26.3% of GDP. This is high in world standards and in line with developed countries. Whilst in 2019, 15.9% came from companies and 25.6% came from VAT (paid by everyone), 39% of total tax revenue came from personal income tax (PIT). Out of our population of over 60 million people, 212 817 had taxable income of more than R1 million in 2019 and those people paid R145 billion or 40.3% of the total PIT. In short, we have a very small number of people in South Africa paying a large portion of the taxes.
Of concern is that this pool is decreasing as many private sector businesses have closed, reduced salaries and wages or retrenching people, meaning less PIT. At the same time, some of the ‘wealthy’ and middle class have had enough of hearing about the ‘theft’ of PPE and food parcel money through corruption and have left South Africa forever. This may have temporarily boosted taxes through the ‘exit taxes’ payable when a person leaves, but removes a long-term source of revenue in the form of income taxes, indirect taxes and wealth taxes – yes, we do already have wealth taxes despite the political rhetoric that implies we don’t and should. Estate duty, transfer duty etc. brought in almost R16 billion in 2019.
The remaining South Africans who earn income start to pay taxes at high rates at levels of income that are low by world standards – 45% on every Rand they earn above R1,57 million. In the UK, for example, a person only pays 45% on every Rand above R3 million.
People who may not be subject to income tax because they own shares (generally retired people who have saved up over their working lives) have been taxed through the company at 28% and then a further 20% on the dividend i.e. effective 42.4%.
Asking for more from these same people is asking a lot. Nevertheless, the fact that there are so few of them demonstrates a structural problem within South Africa - too few people have any means of earning and accumulating for themselves. This problem will, however, not be solved by taxing more. As often repeated by the government, real structural and policy changes need to take place (the NDP and economic plans make this clear) but the will or the strength to implement? Perhaps this COVID-19 crisis is the time.
Back to the 2021 Budget. The only way to solve this immediate dilemma is for everyone to share the burden. The ‘pain’ must be borne by public as well as the private sector. Whilst private sector has cut salaries and lost jobs, public sector is still asking for increases.
Thus, along with the usual increase in alcohol and cigarette taxes, a solidarity tax (perhaps an additional 1% on income taxes across the brackets, which will also impact CGT, and on dividends) may be accepted if taxpayers can see that the public sector is ‘doing its bit’ - accepting the wage freezes proposed and providing a real show of force against ‘wasteful expenditure’.
In short, Tito Mboweni’s budget needs to show a team effort where all members of the team are contributing. We are all in this together.
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