CAPE TOWN – It feels increasingly as though Finance Minister Tito Mboweni’s piggy bank has all but been drained, which means the government will have to get creative with its fiscal approach.
The 2020/21 MTBPS was delayed from the previous week. While no official reason for the delay has been given, there’s speculation that it was because the Finance Ministry needed more time to better align the budget to the President’s recovery plan, which was announced on October 15.
The plan, which includes R100 billion to be spent on job creation, is likely to add pressure to what was already a difficult budget. It comes against a backdrop of a contracting economy and significantly reduced tax revenue – the government is expected to miss its tax target by R300 billion this year. The combination of these two factors severely restricts what action the finance minister can realistically take.
Government cut off the water to its own taps
This has been partly self-inflicted according to Bernard Sacks, a tax partner at Mazars in South Africa.
“Government cut off the water to its own taps when it banned the sale of alcohol and tobacco during lockdown,” he said. “The excise duties and VAT charged on these products are significant sources of income for the government. I’m not a medical expert, so I can’t say whether it was the right thing to do from a medical perspective, but certainly from a fiscal perspective, it was a disaster.”
Widespread job losses have compounded the problem.
“The reduced tax take is likely to lead to a reduction in service delivery,” said Sacks. “This at a time when service delivery is so vitally needed to help nurse this economy and the people who have been so hard hit by Covid-19 and the lockdown.”
The Finance Minister is caught between a rock and a hard place.
While arguably he should be reducing government spend and increasing income (usually through higher taxes), these are things the ailing economy can ill afford.
“At this point, what we really need is a dramatic reduction in government spending, but that’s not going to help us kick start the economy,” said David French, tax consulting director at Mazars in South Africa.
He said the government could essentially turn to two places for income: borrowing or the tax base. “We’ve already accumulated eye-watering levels of debt so it doesn’t seem like a good idea to borrow more. This leaves the tax base as the most likely place government will try to earn more income from. But the tax base is so stretched that I’m not sure how feasible this is.”
Solidarity tax a possibility …
The MTBPS is not usually the time at which large-scale policy changes are made; these are normally unveiled at the February Budget Speech. But then it’s been an unusual year so unusual measures may be called for.
“The only change we’re likely to see, in my view, is the introduction of an extraordinary, once-off tax or some sort of levy,” said Sacks.
French’s concern is that this takes the form of a solidarity tax on higher earners which serves to push more funds and people offshore. It could be similar to the so-called “transition tax”, a once-off, 5 percent wealth tax enacted during South Africa’s transition to democracy on individuals earning more than R50 000.
… but it may have a knock-on effect on emigration
“There’s been much speculation in the press that a solidarity type of tax is likely to be introduced,” he said. “I think this is going to accelerate the emigration we’re already seeing,” he said.
This is a worrying trend that’s being reflected in research like the FNB annual estate agents’ survey which showed that in the second quarter of 2020, 17 percent of people who were selling their home for emigration reasons. Furthermore, in the wealthiest segment (those with home prices of R3.6 million and over) 25 percent of sellers sold their property in order to move abroad.
“Anecdotally, we’re seeing this play out at Mazars in South Africa,” said French. “Our private client business has been inundated with work related to emigration.”
He believes people are leaving the country partly as a result of deteriorating tax morality. Tax morality is the willingness of individuals to pay their taxes and comply with tax laws. The less they trust government authorities to spend their money appropriately, the lower the level of tax morality.
“Taxpayers’ money is disappearing rather than making it into the fiscus,” he said. “Government needs to earn back the trust of the taxpayer before it starts further burdening earners.”
Addressing corruption and regaining taxpayer trust
Measures to improve tax morality would be a welcome outcome of the MTBPS. These would help boost much-needed tax collection, trust and confidence in the government.
The same can be said of repossessing wasteful government assets and recovering monies from those who lined their pockets as a result of state capture.
Althea Soobyah, tax consulting director suggests rather than taxing the legitimate but rapidly dwindling tax base for revenue, authorities should be looking to target those with ill-gotten gains.
“Claw back on the ill-gotten gains from officials who used government funds and make those who’ve abused their positions of power for financial gain pay back the money – with interest, not just the tax,” she said.
After all, the taxpayer is already stretched.
As Sacks highlighted: “Looking at the tax table from the budget review of 2020, taxpayers earning in excess of R1.5 million per year were paying R150 billion out of a total of R560 billion in personal taxes that was collected in the period. This equates to 27 percent of the total tax take,” he said.
He went on to point out that since there are only 125 000 people in this earnings category, this means that less than 1 percent of South Africa’s population of 58 million is contributing 27 percent of the total personal tax take.
“Firstly, we don’t want to chase these taxpayers off our shores but secondly, slapping a 5 percent once-off tax on every single taxpayer will see government bringing in only an additional R28 billion,” he said. This is a drop in the ocean compared to the R300 billion revenue short-fall the government is up against.”
What other options does Mboweni have?
If the authorities decide not to hone in on the direct tax base, they could turn to something like the VAT rate. But a hike here seems unlikely.
After all, the previous one percentage point rise in the VAT rate only managed to generate an extra R20-odd billion, which is a long way off the R300 billion that’s needed.
In fact, Mike Teuchert, national head of taxation at Mazars in South Africa, estimated that the VAT rate would have to reach close to 30 percent in order to close the income gap.
For Tertius Troost, Tax Manager at Mazars in South Africa, the biggest concern is that a VAT change lends itself to fraudulent activity. “Government will need to increase its enforcement to ensure compliance but this would be costly,” he said.
Lower, rather than higher taxes could be a long-term solution
But rather than increasing taxes, government should be looking to reduce them for a better long-term outcome, according to Sacks. Lower taxes would take some time to work through the system, but eventually they would help the private sector spend more and stimulate economic growth.
“It seems counter-intuitive to be dropping the tax rate when tax revenue is dwindling, but now is the time to do it,” Sacks said. “Whether we can afford the time lag is another question though.”
He pointed out that lowering the corporate tax rate could attract foreign direct investment.
Meanwhile Soobyah predicted that the MTBPS could contain measures to support small- to medium-enterprises (SMEs).
“This could potentially include a further extension of the postponement on the limitations of assessed losses in respect of SMEs,” she said. “Extending this benefit to SMEs would stimulate the economy far more than incentivising multinational FDI, which is likely to be taken offshore at the first opportunity.”
Mboweni and his piggy bank
At the end of the day, Mboweni faces a huge tax revenue shortfall. He’s somewhat limited as to what action he can realistically take, and will need to get creative with his solutions. We may see some small change drop out of the piggy bank at this week’s MTBPS but it’s likely we’ll see more meaningful changes to the tax regime in February 2021.
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