Brace for VAT and tax hikes

The 3.5% of individuals in the country with the highest income – more than R1 million a year – collectively pay more than 38% of the total personal income tax that the state collects.

Maarten Ackerman, chief economist of Citadel Investment Services, said this made it clear that Finance Minister Tito Mboweni had little room to manoeuvre when it comes to introducing an additional tax burden during his budget speech on Wednesday.

Ackerman said he believed many of the estimated 98 000 South Africans who emigrated last year fell into the top income bracket and had sought-after skills that South Africa needed.

The state’s financial situation is dire.

Last year, it was budgeted that income would grow by 8.6%, but the figure now stands at 4.8%, which will have an impact on the budget deficit, said Ackerman.

According to Investec economist Lara Hodes, income grew at 4.8% in the fist few months of the financial year, but expenses increased 12% during this period.

Kyle Mandy, head of tax at PwC, expects that government will collect R1.351 trillion in tax (before any tax increases) as opposed to the R1 369 trillion that the medium-term budget policy framework envisioned in October.

The October figures were already R52 billion lower than those in February last year.

He said that Treasury would struggle to fill the gap.

Apart from the R10 billion in additional tax that was already announced in last year’s budget, measures intended to provide for a further R25 billion could be expected.

This could take the form of increased VAT, as well as increased personal income tax though bracket creep (where an insufficient adjustment for inflation pushes salaries into a higher income tax bracket).

Ackerman expects VAT to be increased from 15% to 16%.

Even if it is politically unpopular, this is not an election year, so the ANC government will not have to tiptoe around its alliance partners.

The impact on the poor can also be mitigated by adding more items to the list of zero-rated VAT items.

Higher VAT is the most definite source of income government can rely on.

An increase of one percentage point translates into an additional R25 billion for the state’s coffers, but that’s only slightly more than the current R22 billion in under-collection of budgeted VAT income, said Ackerman.

Sanisha Packirisamy of Momentum Investments said South Africa’s VAT rate was still low compared with other countries, but that an increase now would come at a time when growth in household expenditure was less than 1%, compared with 2.8% growth when VAT was increased in April 2018.

She said higher income would be difficult to achieve.

South Africa’s company taxes, at 28%, are already higher than the world average of 24.2%, and government can scarcely afford to tamper with this at a time when it is attempting to attract foreign investment.

Consumers are also under immense pressure.

Johann Els, chief economist of Old Mutual Investment Group, expects additional income tax for individuals and companies, and increased VAT as a result of the growing budget deficit and rising debt to GDP ratio.

Treasury estimates that the budget deficit will be 6.2% of GDP over the next three years.

“Treasury has been unable to bring the budget deficit under control over the past couple of years. If we cannot stabilise the figures and cut expenditure, Moody’s may downgrade South Africa’s sovereign debt to junk status as early as March,” warned Els.

Moody’s is the only one of the three major credit ratings agencies that still rates South Africa at investment grade.

Government debt as a percentage of GDP is also a cause for concern. It increased from 26% in 2009 to the current level of 60%. Interest payments on debt already make up 11% of government’s total expenditure.

South Africa already coughs up more than R200 billion a year for interest payments – more than the combined annual budget for health, education and the police.

To stabilise South Africa’s debt to GDP ratio, economic growth of 2.5% to 3% a year is required.

Els said that, apart from tax bracket creep, additional sin taxes and fuel levies, taxpayers should prepare themselves for the possibility of an additional levy on income tax for individuals and companies, similar to what happened in the mid-1990s to help rectify the challenges of the past.

Mike van der Westhuizen, a portfolio manager at Citadel, believes that hard work and tough decisions on the expenditure front lie ahead for government.

“Putting a plaster on a bullet wound doesn’t help. Treasury knows what needs to be done to turn the fiscal situation around, but the rest of government has to buy into this and they have to stop fighting among themselves.

“Until that happens, the economy will remain trapped in a downward growth spiral,” he said.

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