South Africa will reach the fiscal cliff by 2042 if it does not change its ways and back up the budget speech with concrete actions, says professor Jannie Rossouw, the Head of School of Economics and Business Sciences at Wits Business School.
Speaking at a budget breakfast hosted by the South African Institute of Professional Accountants (SAIPA) in Sandton, Rossouw warned that if the actions of the government in managing the fiscus are not prudent, taxpayers are going to stop paying taxes.
In late January, Western Cape premier Helen Zille sparked controversy by volunteering to lead a tax revolt in South Africa if the government fails to take action against those implicated in corruption – or if they are again elected into government.
A tax revolt is a political struggle to repeal, limit, or roll back a government-imposed tax.
Zille, via social media platform Twitter, highlighted that there are multiple cases of successful and impactful tax revolts around the world, adding that she would focus on several of these cases.
I’m waiting to see how many ppl get prosecuted and land in jail in a reasonable amount of time after the Zondo commission. If they do not, just watch me. I will be organising the #TaxRevolt. I have tried the electoral route for years. Voters seem to like voting for corruption. https://t.co/WNvDpPKND1
— Helen Zille (@helenzille) January 26, 2019
“In the 21st Century, there have been over 80 case studies of impactful tax revolts. More than double that in the 20th century. But given that we are only in first fifth of this century, the trend is clearly escalating because it introduces accountability in government,” she said.
The premier’s comments thrust the topic of tax revolts into the spotlight, drawing many responses from across the political spectrum. Frustrated South Africans threw support behind the move – while others labelled it as irresponsible and illegal.
Among those weighing in are leading South African economists and legal minds – some of whom have pointed out that a tax revolt is either coming, or already in full effect.
Acting South Africa Revenue Services commissioner Mark Kingon, warned however, that calls for a tax revolt could be viewed as advocating for criminality.
According to Faith Ngwenya, technical and standards executive at SAIPA, the government needs to take proactive steps to get out of the current mess, and to avoid a ratings downgrade.
“People who are taxed too much, either directly or indirectly, will stop being productive or find ways to reduce their tax bill, often illegally,” Ngwenya warned.
“At that point, national revenues drop with any further tax increases. We are now at that point. So the government’s future income will have to be derived from reducing its own costs, which starts with fulfilling its promise to turn around SOEs and reduce its enormous wage bill.”
Rossouw provided his top budget speech takeaways:
GDP was forecast at 1.5% against an IMF global projection of 3.5%, with improved growth predicted over the next three years. “The Treasury has been overly optimistic in its GDP forecasts for many, many years,” said Rossouw.
“They overestimate their revenue, then spend according to this estimated revenue. Then they don’t make the revenue because GDP growth is lower, and they end up in a fiscal hole.” Rossouw recommended that Treasury use more conservative forecasts to regain the public’s confidence.
Wage bill reduction
The government promised to reduce its wage bill by R23 billion over the medium term and offer voluntary retirement to older public servants. This is a good start but needs to be followed by reviewing the public sector workforce and reducing it dramatically.
Revised visa requirements and e-visa pilot
To attract needed skills to South Africa from foreign countries, the government will review its business visa and child immigration requirements as well as pilot an e-visa system. This is great news as it will help South Africa more readily attract the talent needed to bolster the economy, said Rossouw.
Revision of support for SOEs
State owned companies, Rossouw said, will need to meet certain business transformation requirements to receive future support from the government and Eskom will be broken into three independent divisions.
“While this is a positive step forward, any support is still like throwing money down the drain. A more concrete plan of action is needed and the process should be communicated transparently to the public.”
Annual budget deficit
Professor Rossouw also noted that the annual budget deficit would be around 4.3% over the next three years, up from 3.5% in 2018. “This is too high,” he said. “Our growth ceiling is only 2.5% per annum.”
Tax collections and revenue shortfall
Total tax collections for 2018/2019 was around R1.3 trillion with a shortfall of R42.8 billion and the government expects to collect R1.422 trillion next year. Mboweni announced there would be no changes in personal and company tax but additional revenue of R15 billion would come from indirect taxes.
“Although tax remains unchanged, indirect increases will reduce overall disposable income, meaning South Africans will have to adjust their lifestyles accordingly.”
Revenue from tax bracket creep
Income tax brackets will also not be changed. This means that although South Africans will not gain greater purchasing power from inflation-based pay increases, they will be earning more in SARS’ eyes and will be taxed accordingly.
Further, those who move into a higher bracket will be obliged to pay substantially higher taxes, reducing their effective monthly income to below their previous level.
No increases in medical tax credits
Medical tax credits will not be increased to allow for a rise in cost of living so South Africans will effectively be paying more for medical treatment.
Income from fuel increases
Fuel will go up by 29c/litre, which includes a 15c/litre increase in the general fuel levy and a 5c/litre increase in the Road Accident Fund levy. A carbon tax of 9c/litre on fuel will be effective from 1st June 2019. All of this was expected, said Rossouw.
Excise duties on alcohol and tobacco will be increased. Further increasing the price of tobacco is a bad idea. “We are already witnessing the sale of illegal cigarettes overtake legally marketed ones. Another increase will further motivate cash-strapped smokers to buy on the black market,” Rossouw warned.
Restoring SARS effectiveness
Mboweni also promised to repair SARS to ensure it is able to collect revenues effectively. And with the VAT refunds backlog being cleared, the normalised flow of future refunds will provide businesses with greater cash flow confidence.
“Much revenue is lost to tax collection inefficiencies, so it makes more sense to focus on SARS’ operations rather than increasing direct or indirect taxes further,” Rossouw said.