Johannesburg – The most pertinent question from the ordinary South Africans is, will the minister increase our taxes?
The fear of an increase in tax is justified if one looks at the limited options the government has with the low economic output and resultant low revenue.
Though not a popular option, and politically charged, the plain fact is the government might need to increase VAT. Consumer confidence and household incomes are at historic low levels, so this would not help consumer spending.
Consumption expenditure is a substantial contributor to GDP, so it matters.
Personal income tax thresholds in South Africa are at the high end with the tax base being quite small.
This will have shrunk even further with retrenchments and salary cuts implemented to keep companies going.
Options other than tax Perhaps one avenue the minister needs to look at other than reducing government expenditure is to reduce the drain from the system through corruption and wastage by the government departments.
Higher tax rates will bolster revenue, which the government needs to finance the necessary expenditure without incurring debt, as well as servicing existing debt.
Also read: Unemployment rate in South Africa rises to 32.5%
On the other hand, if both corporate and personal tax go up, it means that corporates will spend less on necessary investment, and for at risk businesses it would lead to them cutting back on their labour force.
It also puts pressure on consumers’ disposable income and spending.
Positives consumers can expect:
There won’t be much to look forward to in terms of tax relief.
The best news would be that there’s no increase for high-income earners.
There will be some relief for low-income earners through the normal bracket creep compensation.
Broadly speaking, we always talk about the budget taking place against a backdrop of tough economic conditions; none of us can recall when last these words were so apt.
This all takes place when the global economy is forecast to have shrunk by 3.5 % in 2020. It is projected to grow by 5.5% in 2021.
The South African economy, on the other hand, shrunk by 7.1% in 2020 and will recover to 3.6% during 2021. While the growth rate is good news, the output level is likely not to be at the same level as that of 2019, which means that it’s simply base effects coming into play.
Both the government and the private sector have not spent as much on investment as they did in 2019 because of low confidence and disruptions to the normal business cycle as a result of Covid- 19-related lockdowns.
Dealing with debt Finance Minister Tito Mboweni is likely to announce even higher debt levels than projected during the special budget in October. With high debt levels comes higher debt servicing costs, which further reduce revenue that could be spent elsewhere.
The minister’s speech on Wednesday will hopefully bring some clarity on how the government plans to address the key issues facing the economy.
The balance that the government will be forced to strike against this is to reduce expenditure; and this may include the unpopular proposal to reduce the government’s wage bill.
• By Tendani Mantshimuli, a Liberty consumer economist.
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