South Africa could look to Germany as an example for a wealth tax: analysts

As finance minister Tito Mboweni puts the final touches on his Medium-Term Budget Policy Statement (MTBPS), the biggest issue he must grapple with is the impact of Covid-19 on the economy, says professional services firm Deloitte.

In a note ahead of Wednesday’s budget, Deloitte said that despite the possible introduction of taxes, the market expects a very pragmatic budget – one that takes a strong and definitive position on state financing to inject confidence into the economy.

“The MTBPS is expected to provide some information on structural reforms aimed at growing the economy, as well as provide some detail on the government’s plans to reduce the public sector wage bill, in particular accommodating (or not) the proposed wage increase from labour,” it said.

Mboweni is also expected to outline plans on restricting spend allocated to SOEs that could compel the necessary reforms, Deloitte said.

“Also, plans are expected in relation to providing support to the poorest in society to relieve economic hardship and regarding some sort of financial support to sectors heavily impacted by Covid-19, such as tourism and leisure.”

Will Mboweni look to increase taxes?

Deloitte said that the government has so far been reluctant to increase tax rates as it is acknowledged that South Africa is already a highly taxed country – both individuals and corporates – and there is the distinct risk that squeezing the small and shrinking tax base even harder may well prove counter-productive to the economy.

“It came as something of a surprise that all individual tax brackets – even the ones for higher earners – were adjusted at the time of the 2020 budget to compensate for inflation and avoid the phenomenon of bracket creep which had put higher earning individual taxpayers under increased pressure in recent years,” Deloitte said.

However, desperate times call for desperate measures and the possibility of additional taxes cannot be excluded, it said.

It pointed to reports of a proposed new wealth tax, to be referred to as a solidarity tax.

“Details are still sketchy – with various possibilities being mooted by commentators. No one can deny that all South Africans are affected by the pandemic in many ways. So conceptually, a solidarity tax aimed at bridging us over the Covid-19 chasm, might just work,” it said.

Deloitte said that an example of such a tax was one that was introduced in 1991 after German reunification to uplift infrastructure in the former East Germany, where living standards and average incomes were lower than in the West.

“Such new taxes might be more palatable for jaded taxpayers if it is seen as temporary and based around the philosophy of a social compact aimed at a specific issue – in this case, mitigating the effects of Covid-19.

“The possibility of public acceptance of a solidarity tax, or any other form of new tax, will depend greatly on whether taxpayers have reasonable assurance that the money raised will be spent responsibly,” it said.

What of the NHI?

Deloitte said that Covid-19 has also highlighted the need for universal health coverage, and access to public health care.

However, due to there being limited funding available from the fiscus, government may have to repurpose funding in order to drive any form of new initiatives and be more purposeful in strengthening the health system, it said.

“In his budget speech address in February, the minister of finance articulated a plan focusing on providing care, especially to the vulnerable in a more cost effective way.

“In our view, the minister will use the available budget more effectively by trying to reduce money spent on wasteful expenditure. Irregular expenditure increased from R5.5 billion in 2017/18 to R7.37 billion in 2018/19. The government will have to use what resources it has better in order to support universal health coverage.”

Additionally, the positive public-private partnerships formed to support the government’s response to the Covid-19 pandemic will hopefully be a catalyst for further partnerships, Deloitte said.

“We don’t see timelines of NHI implementation being brought closer, given the funding gap. Like most programs, the time taken for our economic recovery will influence the level of funding that would be available for implementation of a full-blown NHI.”

Read: More taxes will just push money – and people – to leave South Africa: experts

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South Africa could look to Germany as an example for a wealth tax: analysts