Patrick Cairns
4 minute read
24 Oct 2017
7:36 am

Expect Gigaba to increase taxes

Patrick Cairns

He doesn’t seem to have any option.

PRETORIA, SOUTH AFRICA – APRIL 04: Finance Minister Malusi Gigaba. (Photo by Gallo Images / Beeld / Felix Dlangamandla)

As he prepares to deliver his first Medium-Term Budget Statement (MTBS) on Wednesday, finance minister Malusi Gigaba faces a hole in the budget of between R40 billion and R60 billion. That is the likely shortfall that he somehow needs to mitigate.

To put that in context, if government were to increase VAT by 1%, that would only bring in an extra R20 billion.

“We now forecast that the fiscal deficit to GDP ratio will be 4.1%,” says RMB economist Isaah Mhlanga. “That compares to National Treasury’s forecast of 3.1% in February.”

The choice that isn’t a choice at all

Practically, there are only two ways to manage this budget deficit – either the government cuts expenditure, or it raises additional revenues. Sanlam Investment Management economist Arthur Kamp says that reducing spending is not implausible, but also not unproblematic.

“If you look at trends in the expenditure data and the year-to-date numbers it seems that there is going to be some underspend, so the minister has a bit of leeway and he may also announce further cuts to the baseline over the medium-term expenditure framework,” Kamp says. “I do however suspect that that would impact capital expenditure negatively, which is not ideal.”

Politically, it is very difficult for Gigaba to announce any cuts in major government expenditure items like the government wage bill or social services. Either way, there is little he can do to cut back on spending for the current year.

Taxes are coming

Essentially that means Gigaba has to find more money. He could do this by selling government assets, but that looks unlikely.

“The option I would prefer is to sell something,” says Efficient Group economist Dawie Roodt. “But they are probably not going to do that because it will take some time. It’s too late already for this year. Also, the people in charge of the ANC and their alliance partners and are still not in favour of selling things.”

That leaves taxes, and it seems inevitable that these will be raised. Although the MTBS is not usually the place where changes to the taxes are articulated, Investment Solutions economist Lesiba Mothata believes that this year has to be different.

“Gigaba will have to be very specific, because the tax options are all very exhausted now,” Mothata says. “To introduce certainty he would have to show where he is going to get what he needs, especially when there are discussions about PIC money. He has to be very clear on where he gets the money, and there will be disappointment if he doesn’t.”

The list

Mothata says that there is a list of potential tax changes, which he believes are all likely. These include removing the VAT exemption on fuel, which could raise R30 billion to R40 billion; doing away with the VAT exemption on electronic services and online transactions that could add another R8 billion; and scrapping medical aid credits, which could bring in another R10 billion.

While these together could potentially make up the shortfall, they are far from uncontentious. Introducing VAT on fuel purchases would be the most politically difficult, given the enormous impact it would have on the majority of the population.

Novare economic strategist, Tumisho Grater, suspects that Gigaba has two other likely options.

“He could look at limiting the relief for bracket creep,” she says. “In other words, not adjusting tax brackets for inflation. Another thing would be to possibly look at raising existing wealth taxes, although already we are seeing that particular demographic under pressure.”

What he can’t afford to do

Given the situation in which the country finds itself, Gigaba clearly has tough choices to make. He has to raise more funding, but one thing he cannot afford to do is simultaneously increase expenditure.

“He cannot afford to lift the expenditure ceiling, or abandon the expenditure ceiling,” Mhlanga says. “If he were to do that, that would be very negative for markets. It would say that we are abandoning fiscal consolidation.”

That doesn’t however mean that there won’t be pressure from some quarters for him to do exactly that.

“I think minister Gigaba is in a difficult position, because it depends who his audience is,” says Investec Asset Management’s Nazmeera Moola. “If it is ratings agencies, funders and markets he can’t afford to not provide budget consolidation over a three-year time horizon. He can’t afford to not be cutting expenditure and raising revenue.

“But I’m not convinced his audience is only his funders,” she adds. “So politically, his requirements are much more complex. The ability to cut expenditure in the current environment where there is speculation about whether or not he will remain finance minster is much more difficult.”

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