Budget 2017-An analysis into the options available to the National Treasury

pravin-gordhan

Pravin Gordhan, Mcebisi Jonas and their competent team at the National Treasury are in an unenviable position. On the one end, they are hard pressed to find the money to fund the revised total of R43billion shortfall necessary for our governments expenditure needs. On the other side, they have to contend with continuous speculation that a largely unwelcomed cabinet reshuffle is imminent. This reshuffle is predicated on the need for what Jacob Zuma calls “radical economic transformation”. In this article I aim to outline the seriousness of this task and the implications of what happens in the speech and beyond. I firmly believe that it is important for all young South Africans to critically engage with the policy direction that our government takes as it affects all of us.

In order to ensure that the Treasury makes up its current deficit, it needs to ensure that it increases its revenue. Judge Dennis Davis led a team that recently studied the feasibility for an increase to the current 14% the Value Added Tax (VAT) rate. There is no doubt about the positive impact that such an increase would have on the fiscus. That said, economic theory, as was the case with Judge Dennis Davis’ team, suggests that such an increase would be regressive. Put another way, the tax incidence, which is economic jargon for understanding who ultimately bears the burden of an increase in taxes, will largely fall on the poor. Predicating this with the economic and political climate that the government currently faces, leads me to believe that such an increase is unlikely. South Africa is a country that has extremely high levels of inequality and unemployment which implies that such a policy decision would be unwelcome. That said, it could be made more palatable should the government include measures to reduce the tax incidence of the increase in VAT. This could include higher levels of social grants for those most effected or increasing the basket of VAT exempted goods.

A more realistic outcome would be for the Finance minister to increase the level of income tax. Such an increase is progressive insofar as it helps bridge the gap between the rich and the poor as the incidence falls largely on higher income individuals. This can be done in two ways. The first of which is to increase the marginal rate, say from 39% of total income to 40%. Alternatively, the government could implement what is called a “bracket creep adjustment”. This is when they tax and manage for higher incomes that are a result of increased inflation. This increase would lead to smaller levels of revenue but more acceptable for those South Africans who have to pay higher levels of tax.

An increase in the “sin tax” or “sugar tax” is also an attractive option for the Treasury. The economic argument for such intervention is argued on the basis of market failure. This market failure argument stems from the difference between the individual costs of debauchery/obesity relative to the higher costs on the public healthcare system and society. Therefore, such a tax would increase the cost of consuming alcohol and unhealthy foods and dis-incentivize this costly behavior. Taking this logic a step further, an increase in such a tax would ultimately lead to an improvement in ordinary South Africans’ health whilst simultaneously decreasing the financial strain on our public healthcare system and communities at large. Finally, it is argued that these “bad” goods have a relatively inelastic demand, which makes it an attractive and much-needed revenue stream for the government. That is, as an increase in price is larger than a change in the demand for these goods.

An alternative approach to looking at the much-maligned sin or sugar tax was mentioned to me by a senior executive of an affected firm over dinner one night in Melrose Arch soon after last years Budget Speech. His argument quoted statistics from StatsSA that highlighted the fact that poor South Africans spend approximately 34% of their income on food relative to the rich who spend only 10% of their income on such goods. This implies that such an increase in taxes on these goods will also be regressive.

The executive went even further to state that affected firms are already shifting towards “light beers” and zero sugar content products. This is complemented by consumer’s higher demand for these goods. He went on to ask the question on whether it is fair to continuously increase these taxes if the total sugar and levels of alcohol are dropping per unit sold. His suggestion was that it is cheaper to legislate manufacturers to supply the relevant health information on packaging and pursue an aggressive marketing campaign outlining the costs of consuming such goods. That is in order to ensure that a sugar or sin tax does not undo the private sector’s progress made towards shifting consumer’s behavior by increasing prices across the board. Finally this suggestion, he argued, would decrease the administrative costs of such a tax and allow consumers to make their own consumption decision in lieu of the aforementioned associated costs.

I would further suggest investigating the benefits of partially privatizing inefficient public monopolies. Beyond providing significant revenue into the fiscus, privatization would allow for these companies to exert significantly more influence and economic efficiency in a state owned monopoly environment desperately in need of reform and improvements in resource allocation. This could be complemented by more oversight by a newly developed “state owned enterprise corporation” that allows for an overlying authority and communication mechanism across industries and includes all of the relevant stakeholders. Furthermore, we need the Treasury to commit to significantly decreasing our bloated public sector wage bill. I believe these suggestions are  very unlikely given the current populist slant towards “radical economic transformation” This implies that both the privatization of SOE and a significant decrease in the public wage bill are unlikely policy measures that can be expected in the near future.

Finally, I believe that it is necessary for the budget to outline resources aimed at ensuring that we are able to reinvigorate economic growth in South Africa. I cannot stress this enough as I believe that the current economic pie is just too small and growing to slowly for us to make significant inroads into undoing the injustices of the past. Therefore, we need to ensure that we outline an increase in the levels of funding towards educating South Africans at both a primary and tertiary level. Moreover, we need to create slack and an environment for public and private investment into infrastructure and platforms that promote productivity growth and innovation. This includes ensuring government’s commitment to reducing the regulatory and infrastructure gaps currently inhibiting small businesses and entrepreneurship.

To conclude, I do not believe that radical economic transformation will ensure the long-term upliftment of our people no matter how seductive it may sound. Our country needs young and informed South Africans to err away from promoting such rhetoric in the Budget Speech and across government. Instead, we need to ensure that we are committed to improving the robustness of our economy and society such that we ensure the inclusion of millions of poor and marginalized young black South Africans currently excluded from the economy. This is by no means an easy task. That said, I have faith in the current crop of public servants at the National Treasury that are committed to protecting our fiscus from those who are not as infallible.

“Nkosi Sikelel’ iAfrika, Maluphakanyisw’ uphondo lwayo”

God Bless Africa, may her glory be lifted high

About the Author

Carlos Baeta
Proudly South African. Masters student at Fordham University in New York. Entrepreneur, young leader, coffee addict and an avid Liverpool fan. Let's change the world.

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