Has SA reached the ceiling for tax collection?
The court of public opinion has it that the 2017 Budget Speech represented a contractionary budget with increased taxes and with lower levels of incentives for economic activity.
In light of this, Prof Danie Meyer and Dr Andre Mellet from the North-West University’s Vaal Triangle Campus (NWU) and experts in local economic development (LED) and monetary economics respectively, is posing the question: Has South Africa reached its ceiling in terms of tax collection?
In the following opinion piece, they comment on the current economic climate and the increased tax burden which consumers are carrying and the risk the government runs in increasing personal tax in the near future.
An economy under pressure
The increasing tax load on a minority of tax payers - to serve the current government expenditure and debt, is contributing to the low levels of economic growth in South Africa and with only a 0,3 percent GDP growth in 2016 (and a negative growth of 0,3 percent in the fourth quarter of 2016) the economy is under immense pressure.
Consumers are also under pressure with high levels of inflation and interest rates. The annual budget speech is an important policy statement of government regarding the economic and spending outlook. The budget therefore should give a clear indication if government has the intention to give incentives to businesses to grow with an expansionary approach, or to use a more contractionary approach. Currently the general viewpoint by most commentators is that there are simply not enough incentives for people to start and expand businesses due to policy uncertainty leading to a lack of investment. A recent business survey in Europe found that one of the main reasons why South Africa is not attracting investments from European countries is the policy of BBBEE. Investment, especially foreign direct investment (FDI) is needed for economic growth and we have seen a decrease in investment over the last few years.
The budget also indicates whether government’s approach is more welfare or developmental orientated. Our opinion is that the current budget is more focused on social-welfare. The budget allocations are more focused on re-distribution of wealth than on the creation of new wealth. Fiscal theory states that if economic growth is low, taxes should be reduced to stimulate higher levels of spending. The Finance Minister has however elected to increase taxes which will most probably result in reduced consumer spending relating to a contractionary rather than an expansionary budget implementation approach.
Budget Deficit and Government debt
If government expenditure is more than the income (as the case is in South Africa), government experiences a deficit. This deficit should not be more than three percent of GDP according to directives by the IMF. National Treasury must finance this deficit and this situation limits the Treasury’s ability to reduce taxes and therefore to stimulate economic activity. Government debt has been rising rapidly to over 50 percent of GDP in recent years and this cycle needs to be turned around. More money is currently spent on serving the debt on an annual basis than what is spent on for example land reform or on higher education combined.
Growth in Government expenditure has been constant at approximately 33 percent of GDP and should in fact be decreasing over the next few years, especially regarding government salaries. A budget deficit of R139 billion was forecasted for the fiscal year 2016/17 which increased to R147,9 billion. The income of government was under pressure because of the low growth in the economy. A budget deficit of R149 billion (which is 3,1 percent of GDP) is forecasted for the fiscal year 2017/18 which is R13,7 billion higher than the figure forecasted in the previous budget speech. The lower income of government is expected to continue in the new fiscal year.
The expenditure by government is consistently more than its income. The government debt should not be more than 40 percent of GDP according to directives of the IMF. The increase in government debt for the last few years has been enormous and the debt as a percentage of GDP continues to escalate. The debt increased from R1799 billion or 46,8 percent in 2014/15 to an estimated figure of R2478 billion or 52,3 percent in 2017/18. The estimated amount of interest paid on government loans amounts to R153 billion or 11 percent of current expenditure for 2016/17 and the forecast for 2017/18 amounts to R169 billion or 12 percent of current expenditure. The management of the debt and the increase in the percentage to GDP is one of the parameters which the credit rating organisations evaluate every year and is a major concern towards junk status.
Joe Public and the increased tax burden
The Minister of Finance proposed tax changes to the value of R28,1 billion. The major sources of increased taxes are R16,5 billion in personal income tax and R6,8 billion in dividend withholding taxes. A new category of personal tax was implemented for tax payers earning more than R1,5 million at a marginal rate of 45 percent. The new category will bring in R4,4 billion of additional tax revenue. This new tax bracket will have a negative impact on high earners and could serve as a push factor resulting in high earning individuals leaving South Africa for more tax friendly countries.
|Prof Danie Meyer||Dr Andre Mellet|