Budget squeezing an already bled tax base – IRR

2017-02-24 05:00 - Lameez Omarjee
Finance Minister Pravin Gordhan ahead of his 2017 Budget. (Photo: Matthew le Cordeur)

Johannesburg – Finance Minister Pravin Gordhan’s Budget Speech lacked a plan for growth and austerity, said Gwen Ngwenya, chief operations officer at the Institute of Race Relations (IRR).

The IRR released a report on the National Budget, which was delivered by Gordhan in Parliament on Wednesday. It highlighted that government expenditure will continue to exceed revenue by a high margin, adding more pressure on an already burdened tax base.

“The Treasury’s plan is an exercise in extracting blood from a stone by squeezing an already over-bled tax base,” said Ngwenya.

She said that the state has been taking a greater portion of the wealth generated in the economy. “Government expenditure as a proportion of gross domestic product has increased from 26.4% in 1994/95 to a projected 33% in 2017/18. By international standards this is a very high level,” she explained.

Ngwenya also referred to increasing debt levels, up from 26% of GDP in 2008/09 to the current level of 50.7% of GDP. “As debt levels have increased, so too has the government’s interest bill. The state’s debt cost amounted to 8.8% of total expenditure in 2013/14 but is forecast to increase to 11% in 2019/20,” she added.

The state debt burden is currently at 10% and servicing this debt could be spent on health, housing and community development. It is equivalent to half the education budget, according to the report. “Debt is therefore starting to crowd out other areas of expenditure,” said Ngwenya.

With the tax-to-GDP rate already high, and no “sustainable options” to raise revenue in future, said Ngwenya. Only significantly higher levels of growth will free the state from a tax-to-GDP trap, according to the report.

Burdened households

Household debt is 50% higher than in the 2000s, and the tax on sugary drinks coming in later this year and the fuel levy of 30 cents per litre will further “gouge” household incomes, she explained.

Personal income tax is the largest single contributor to tax revenue at 38.1%, compared to corporate income tax contributing 17.3% and VAT which contributes 24.7%. Relying on the middle class and individual taxpayers to help reduce the budget deficit is not a sustainable policy avenue, according to the report.

“The government has very little room to manoeuvre. If current growth and revenue collection targets are not met, the government may find itself in a considerable degree of fiscal, and therefore political, difficulty,” said Ngwenya.

Reducing the budget deficit requires austerity, as economic growth is far too low, explained the report.

However, austerity measures would be accompanied by political difficulty for the government, and to avoid austerity, growth is required. But there is no clear growth strategy laid out, according to the report.

National and provincial administrations share the bulk of the responsibility for spend which is wasted through “corruption” and “inflated tenders” and empowerment contracts, said the report. “Cutting wastage and corruption would reduce the deficit pressure on the government.”

The report found that increasing corporate tax above the current 28% would do more harm than good as South Africa’s economic competitiveness is already reduced. Further, increasing the VAT rate would lead to political consequences. Spending less money on social protection, which accounts for 60% of expenditure, and personnel expenditure, which accounts for 35%, would give government breathing room. But this also carries political consequences.

“Our view is that the government has come close to maxing out the revenue it can extract from the economy, but has no workable plan to create new revenue,” said Ngwenya.

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