wealth tax

Another side to the BIG issue: what’s the plan when SA cannot afford any more tax?

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The basic income grant is the BIG issue on the table this year, as Finance Minister Enoch Godongwana prepares his inaugural Budget Speech. At the State of the Nation address (Sona) earlier this month, President Cyril Ramaphosa bought government a bit of time in making a more permanent decision on the grant, opting instead to extend the Social Relief of Distress (SRD) Grant for a further year.

Promised the President in his Sona address, “During this time, we will engage in broad consultations and detailed technical work to identify the best options to replace this grant. Any future support must pass the test of affordability, and must not come at the expense of basic services or at the risk of unsustainable spending.”

Sound sentiments, but then what is the plan to fund the BIG? I believe that there are limited options at government’s disposal, and the most likely of the proposed funding mechanisms is also that which is expected to cost the private sector and tax-paying citizens: tax hikes.

The budget deficit remains at an all-time high. There is some additional revenue in the current commodity cycle and weaker rand, but these are cyclical, and cannot be incorporated into a longer-term forecast with any degree of certainty. This means there are likely to be tax increases on the table.

While there has been some recovery in tax collection, it is still sluggish, and that a value-added tax (Vat) hike, personal income tax increase or the implementation of a so-called ‘wealth tax’ would only add more pressure to a diminishing tax payer base. A small portion of the population already pay an inordinately high amount of tax, and the risk is that we will begin to lose this source of revenue should we see further increases — either through tax avoidance or the immigration of highly-skilled individuals.

Most corporates can also ill-afford increasing taxes. This year’s Sona has been widely hailed as the most pro-business speech to dateWhile the Congress of South African Trade Unions (Cosatu) believes that a viable option to fund the BIG could be through adjusting the corporate tax from 27% to 30%, the reality is that we need to grant these companies the leeway they need to create jobs and bolster our economic recovery, which the President acknowledged in his speech.

Momentum’s own economists have listed the country’s high level of poverty and the government’s plan to introduce new grants among the main risks to the country’s fiscus in 2022. While it noted that tackling inequality was necessary, it said that this would become increasingly challenging considering that South Africa already spends 3.3% of its gross domestic product (GDP) on social expenditure.

There is no disputing that the social need remains dire. According to a panel appointed by the Department of Social Development, the International Labor Organization (ILO) and the United Nations-backed Joint Sustainable Development Goals Fund, 20% of households fall below the food poverty line — equivalent to a monthly value of R595. The SRD Grant did the important job of supporting the unemployed during the pandemic, lifting millions of people above this food poverty line. It offered a welcome bit of relief for those who found themselves unemployed and under extreme financial pressure — however, it is far from enough to successfully pull people out of poverty, and it is not a sustainable model in the long term.

Concerns have also been raised by invested parties that the BIG may create a sense of dependency on the state, while another contingent argues that a functioning social grant sees little negative effects in developed countries. Van den Berg says that in South Africa, there are deep-rooted systematic issues that need to be addressed in order for a grant to do the job for which it’s intended; that is, to act as a lifeline for those facing extraordinary circumstances, allowing them to get back on their feet.

So, what should the plan be? I believe that government’s plan of enabling businesses to thrive is a good one, and should be the primary focus.

The President was right in saying that it is private sector which creates the majority of jobs, and so we desperately need to free up businesses, allowing them the runway they need to recover and to grow. We need to relook labour legislation, so that businesses are not discouraged from employing more staff. Consider how much red tape is needed to start a business, or the onerous process that an informal trader must complete to gain a trading licence. We need to relook our framework so that it will enable, rather than curtail.

We must create the jobs that give people meaning, and empower people to be self rather than state reliant.

Hannes van den Berg is Consult CEO. 

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