Plan for risky times

 

The astonishments in the main budget are most often announcements of changes in tax rather than spending. The so-called “mini-budget” last October has already summarised the government’s spending plans, and has given estimates of spending and revenue for the next three years.

 

It won’t be a surprise to hear that taxes on alcohol and tobacco are going up, along with the fuel levy. Those are a given. But this is going to be, as Pravin Gordhan has pointed out, a budget planned in dangerous times.

 

Gordhan tomorrow might well envy his UK counterpart, who is allowed to take a drink while presenting the budget to the House of Commons. The budget is always a high-wire act, but this year it is as if someone’s shaking the wire.

 

Europe, our biggest trading partner, and a major investor in South Africa, is looking unstable as the cracks in the Eurozone widen. The world has only just emerged from the financial crisis, and the International Monetary Fund is gloomy about world growth.

 

If the world suffers, so do the profits of our companies, their ability to create and retain jobs, and the tax money the government receives from them. The government has more control over its spending than it has over the amount of tax, but cutting spending is perilous when you are trying to recover from recession.

 

And so many people rely for survival on government grants that it would be political suicide, not to mention heartless, to cut back on that area of the budget.

 

Savings can be achieved by being more efficient in money management and cracking down on tax fraud and inappropriate spending, and Gordhan has put in place measures to achieve this – but there is a limit.

 

While Gordhan is under pressure not to cut spending too much, tax money is not rolling in the way it was a few years back, when each year the government got more than estimated.

 

It is appropriate in times like these for government to borrow to spend to boost the economy, as it has been doing. The level of government debt was for a long time at a comfortable level, but is heading into uncomfortable territory. In the wings, the credit rating agencies watch warily to punish with lower ratings what they regard as signs of recklessness. Lower ratings means the cost of debt increases.

 

And, as Gordhan has admitted, too much money is devoted to spending on the salaries of public servants and not enough on things like buildings, railway lines, roads, power stations, phone and broadband cables.

 

The President has promised in his State of the Nation Address a new emphasis on infrastructure.

Moreover, the National Health Insurance scheme is on the cards, and the figure mentioned in the 2011 Green Paper for this is a hefty R125 billion.

 

So where is the revenue to come from? Raising company tax could discourage investment. Raising personal income tax risks alienating the few million individuals who pay most of the tax in South Africa, encouraging illegal tax evasion and more legal tax avoidance.

 

Gordhan may allow “bracket creep” to do the job, that is keeping the tax brackets the same and leaving inflation to increase tax by pushing people into higher tax brackets. Inflation is not high enough and the tax brackets not numerous enough for that to be as effective as it was in apartheid-era South Africa.

 

The kind of surprise we might see would be an increase in the Value Added Tax rate. VAT is an efficient but not a “progressive” tax in that rich and poor pay the same rate, so the country’s largest labour federation Cosatu is implacably opposed to it.

 

But National Health Insurance, among other projects, needs to be funded, so Gordhan could raise VAT to the nice round figure of 20%, and at a stroke bring in tens of billions of rands in extra tax. More basic items could be made exempt or zero-rated to mitigate hardship.

 

I hear the howls of rage as I propose this, and Gordhan is not likely to introduce such a dramatic and inflationary increase. However, a one percentage point rise would also arrive at a neater figure, for a simple increase in revenue this year and in the following years.

 

Along with, or instead of, a rise in VAT, Gordhan could also introduce a payroll tax, or a specific tax for the NHI; he could introduce a super-tax on mining profits; and he could raise sin taxes to as high as those in Northern countries.

 

What middle-class taxpayers cannot expect is more of the pleasant surprises, like extensive tax relief, of the past. On second thoughts – we may need that drink more than the Finance Minister.

 

* Reg Rumney is the director of the Centre for Economics Journalism in Africa at Rhodes University. Sponsored by the South African Reserve Bank and the Standard Bank of South Africa, the centre aims is to improve the coverage of economics, finance and business on the continent. Rumney is researching business media in South Africa and writes columns for the Mail and Guardian newspaper.