If there was one sentiment that hung heavy over finance minister Tito Mboweni’s budget this week, it was the dawning of the grim reality that the SA economy is just too fragile to handle new tax increases.
This was the sober and sombre message from the National Treasury, after it fell R63.3bn short on revenue collection. To put the size of that shortfall in context, it’s a bigger miss than the SA Revenue Service sustained at the height of the global financial crisis 10 years ago.
Weaker-than-expected economic growth — now forecast at 0.3% for 2019, instead of the initial lofty 1.5% budgeted for — kept wages stagnant, dampened spending on consumption and depressed company profits.
"It would be foolhardy to increase taxes in such difficult times," said Mboweni in a media briefing before tabling the budget in parliament.
The Budget Review echoed the minister’s sentiment. It stated bluntly that substantial tax increases are unlikely to be effective, as SA already has a relatively high tax-to-GDP ratio compared with other countries at a similar level of development. If anything, new tax increases could harm the economy’s ability to recover.
On this point, Mboweni wrong-footed pundits. Before he stood up to speak in parliament, analysts widely expected another hike in the VAT rate. Remember, it was hiked by only one percentage point two years ago after being on pause at 14% for two decades. By international standards, VAT was the one area where he still had room to manoeuvre, considering that many countries typically milk consumers for more than 20%.
But Mboweni evidently saw that the risk of tax fatigue poses a serious challenge for Sars commissioner Edward Kieswetter, who needs to reform an institution that had underperformed for at least half a decade.
Enhancing the tax agency’s capability to collect, said Kieswetter, would be preferable to simply creating new taxes, which often also creates new opportunities for abuse.
Investec chief economist Annabel Bishop says: "The net effect of hiking taxes would be for a further dwindling in real disposable [after tax] income growth, which has been a key driver for the slowdown in economic growth in SA."
In the end, personal income tax garnered R528bn for the state coffers, VAT contributed R344bn and corporate income tax provided a further R217bn. Taken together, these three revenue streams account for more than 80% of total tax revenue.
The problem is, all three categories came in below expectations. But instead of trying to make up the shortfall by rejigging future projections of revenue, the Treasury has decided that spending cuts — and not higher taxes — are the preferred method of fiscal consolidation.
This time last year, when the Treasury fell short of its tax collections, it said it planned to rake in an additional R10bn during the 2020/ 2021 fiscal year. It has now let go of this idea.
But Momentum Investments economist Sanisha Packirisamy says the Treasury must have been cognisant of the stresses consumers are under at the moment.
Instead, the budget even allows for R2bn worth of tax relief, as it adjusted the tax brackets upwards by more than inflation. In previous years, "bracket creep" was used to pad revenue in a stealthy way, as it gave the fiscus an extra bite of people’s wage increases.
Similarly, Mboweni held off on hiking corporate taxes, so that he could try to broaden the tax base instead. But those who have slipped through the tax net (those companies which engaged in profit shifting to low-tax jurisdictions, for example) are now in his eyeline. And large churches which do not comply with tax regime rules are also on his hit list.
"There will be a renewed focus on illicit and criminal activity, including noncompliance by some religious public benefit organisations," Mboweni said.
He hinted that he would have preferred the tax rate to be even lower. Should he get his wish of a broader tax base, this could lead to corporate income tax cuts in future.
Nonetheless, companies in SA still have to fork out 28% in tax. In many other jurisdictions, corporate taxes have been trending lower in a bid to attract multinationals to invest and create new jobs. SA has been out of step on this front.
"We also agree that corporate income taxes actually have to come down, instead of go up, otherwise we run the risk of pricing ourselves out of the market," says Packirisamy.
Even the Treasury’s usual easy target of excise duties on tobacco and alcohol — so-called sin taxes — came off remarkably lightly, compared to previous years. In real terms, sin taxes were mostly kept stable, with hikes largely equalling the Treasury’s inflation projection of 4.4%.
While habits such as drinking and smoking have long been taxed, another vice that has not been in the Treasury’s crosshairs for long is sugar. Since it was introduced, the "health promotion levy", which is a tax on sugary drinks, has brought in more than R3bn in two years. It’s a controversial tax, unlikely to bring in much benefit for the fiscus in the long run, since beverage manufacturers have simply substituted other sweeteners for cane sugar.
Other tax hikes this time around included a 25c increase in the levy on plastic bags, while the carbon tax is expected to bring in R1.75bn over the next few months, Mboweni said.
Of course, when fiscal problems cannot be solved through bringing in more money, cutting costs is the only option you have.
It meant that Mboweni has had to look to cut spending by R261bn over the next three years, including lowering the public wage bill by R160bn over the medium term.
But having already pulled the lever of large tax increases over the past five years, government had limited room to do so again. Tax cuts may have been the right medicine for weak growth in previous years, but not this time.
Cannon Asset Managers CEO Adrian Saville says while this budget does not stimulate the economy, "it will stimulate confidence if he gets the wage settlement through".
Still, unless the economy begins growing, the only thing you can reliably expect to grow will be the gap between the government’s projections of revenue and what it collects. The budget may have pleasantly surprised economists, but the hard work remains.
Says Saville: "All of this only matters if we don’t find ourselves in the same precarious position in 12 months’ time."
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