Finance Minister Malusi Gigaba’s plan to recover a R50.8 billion shortfall through borrowing is certainly not the way to go, because South Africa cannot afford to be in any more debt.
According to financial experts, with South Africans already finding a hole in their pockets, growth and development will also remain sluggish, due to money from the national budget spread out thinly since a portion of it has to pay debt.
“A more substantive method to recover losses is needed. Less money hurts everyone,” Tertius Troost, tax consultant at Mazars said.
“You want strong growth and government to have money to invest in projects to promote further growth.
“The more money that is invested in the economy, the more it would assist in growing the economy. If you can grow more than 0.7%, then you can collect more tax. You can then cover expenses.”
Borrowing money would push the debt level up from 51% to 61% debt to GDP ratio, he said, adding that it was critical in any country to grow the economy and provide a better tax base.
But in South Africa, the economy was weaker, resulting in the budget deficit.
“We are in a difficult space – we need money to invest – but you don’t have that money. It’s a catch-22 situation.”
He added that South Africa’s growth rate was a lot less than the global norm and that was where the issue lay.
“Something is structurally wrong in South Africa. While the rest of the world is growing, we are getting left behind.”
Troost said of the three main tax avenues, including personal income tax and corporate tax, value-added tax (VAT) would be an easy win to remedy the situation.
However, with a national election coming up in 2019, government would rather be seen as a sweetheart to voters, instead of an administration taking more money from fuming citizens.
“I believe that increasing the VAT rate will provide additional revenue to assist in targeting the shortfall. But whether government has the appetite is difficult to say, especially since we are nearing the next election.
“Even a two percentage point increase in VAT is additional revenue of R20 billion. And then maybe, as soon as you have people up in arms, you reduce it by one percentage point.”
Troost also predicted tax rates from salary earners to go up by at least 1%. But that only accounts for 13%of South Africans who are employed and pay tax.
Increasing the fuel levy would also only provide money that is seen to be a drop in the ocean, since not everybody owns vehicles.
Even scarier, he said, is that state-owned entities needed money and there was, for example, a water crisis in the Western Cape, but the contingency fund would be decreased.
“This is alarming because we have crises which needs funds.”
Troost added that increasing corporate taxes would not make South Africa look internationally competitive in the global arena.