Cape Town - As the National Budget is imminent, uncertainty is building over the political future of Finance Minister Pravin Gordhan, with more calls apparently coming from within the ANC for his removal.
To add to the pressure on Gordhan, he will have to do the unpopular thing on Wednesday afternoon and raise taxes to boost state income to balance the books. With low economic growth and a dangerously looming state debt burden, South Africa has run out of fiscal space.
Rumours that Gordhan will soon lose his job gained momentum over the weekend after the African National Congress in North West nominated the disgraced former head of Eskom, Brian Molefe, to Parliament. A group of ANC leaders also told Eyewitness News they were going to use an ANC National Executive Council meeting this week, ostensibly about policy, to argue that Gordhan should be fired as finance minister.
The meeting has come and gone with apparently no discussion about Gordhan, who also received the thumbs-up from the ANC in Gauteng and the ANC chief whip in the National Assembly, Jackson Mthembu.
But groupings like the ANC Youth League have also asked for Gordhan's removal because "he and the Treasury are blocking funds for transformation".
It is speculated that Molefe will be brought in as deputy minister of finance after the budget, replacing Mcebisi Jonas. That would put more pressure on Gordhan to quit and go into retirement, it is said.
Nothing is certain though, which adds to the build-up of pressure. What is certain is that the government needs R28bn in extra tax income to meet its medium-term fiscal plans. Gordhan already said so in October last year, when he delivered the mini budget.
Together with spending cuts, the aim is to boost the state's finances by about R50bn.
Analysts and economists expect the following regarding tax hikes:
- Personal income tax is likely to be a target for more money. It has already increased from 33.8% of total tax income in 2011/12 to 36.4% of total collections in 2015/16. There could be no adjustments for bracket creep as well as a possible new bracket for the super rich.
- Every year, smokers and drinkers are punished for their 'sins' and called upon to pay more tax. So-called sin taxes will again be raised by a substantial amount.
- Fuel tax is another candidate for raising more income. More clarity on a tax on sugary drinks and a carbon tax will probably also be given.
- An increase in the value-added tax (VAT) rate is widely regarded as the most effective way to raise more than R20bn extra, but it looks unlikely. The Davis committee, which is reviewing the country's tax system, indicated last year that a higher VAT rate is not on the cards.
'Low’ VAT rate a political hot potato
Johann Els of Old Mutual Investment Group calculated that raising the VAT rate by 0.5 of a percentage point would bring in about R10bn. However, there is political pressure not to raise VAT above the current 14%.
READ: VAT may well be Gordhan's biggest political headache - analyst
The UK recently lifted its VAT on goods and services from 17.5% to 20%. The average rate in Brazil is 17% and in Russia it is 18%, with a lower rate of 10% applicable on basic food products.
Marcus Botha, head of corporate tax at audit group BDO, says there are concerns in South Africa about a too high VAT rate because of the effect on poor people. But many of the goods which poorer people buy are already exempted from VAT. Social grants for poor people can also be lifted to compensate for an increase in VAT.
Zohra de Villiers, tax director at KPMG SA, says our VAT rate is lower than the world average as well as the average in Africa, and can therefore safely be raised to 15%.
Income tax already high
Dr Azar Jammine, chief economist of Econometrix, recommends a tax of 0.25% per year on the value of bonds. He says it can bring in R35bn of tax income for the government. It is also a method to redistribute wealth in a practical manner. He warns that too high levels of personal income tax will set productivity back in the long run.
De Villiers says our maximum marginal tax rate of 41% compares unfavourably with the world and African average of 33%.
READ: Direct or indirect: No escaping the taxman
This makes it more difficult to attract wealthy individuals or companies to bring skilled employees into the country.
De Villiers expects tax brackets for individuals to be raised by 1 percentage point.
Wasted state spend
The Free Market Foundation last year calculated Tax Freedom Day - the day on which taxpayers can start earning for themselves after paying off the taxman - to be on May 25. That was five days later than in 2015.
Dawie Roodt, chief economist of the Efficient Group, says money wasted by the state has a negative effect on taxpayers. Badly spent money also has a wide impact. One of the biggest spending items in the budget is education, "but our education system is one of the poorest in the world”.
The auditor general last year indicated that irregular spending of state money jumped to R46bn in the financial year to end-March.
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