South Africa is broke: Now what?
Where will the finance minister find the money needed for the budget to pass?
Zoe Thomas
Finance minister, Enoch Godogwana Picture: @TreasuryRSA/Twitter
When South Africa's finance minister, Enoch Godongwana, proposed to increase Value-Added Tax (VAT) by two percentage points, from 15% to 17%, he said the country had very few other options to raise revenue. This caused outrage among his peers in the Government of National Unity and the public, who believed that this increase would make the cost of living so much harder for the most vulnerable of South Africans. The delivery of the budget speech was then delayed until 12 March to give him time to find another way of raising funds to fund the government budget.
What's the issue?
South Africa does not have enough money to fund all the spending planned for the year ahead. It is R22.3 billion short of its income target from tax revenue. That is a lot of money to fall short on!
The most important thing to know upfront is that governments usually raise money in three ways. Through:
Increased taxes
Borrowing money
Cutting expenditure
Why does it matter to you?
Godongwana says it can't tax businesses more because it will dissuade investment in South Africa. Corporations are already heavily taxed in the country. He says personal income tax can't be raised much more because the pool of people who actually pay tax is tiny. (There are some 7 million taxpayers who carry the burden of 51 million+ South Africans.)
So that is how he landed on VAT, which is a tax collected on goods and services. National Treasury says that if VAT were to be increased from 15% to 17%, it would raise an additional R60 billion in revenue. That is money the country desperately needs to fund government spending, especially at a time when it is actually short on cash to the tune of R22.3 billion.
The finance minister wanted to use the money made through the VAT increase to fund areas such as public sector wage increases, early childhood development programs, retention of essential workers like teachers and doctors, and to stabilise social grants that more than 28 million South Africans survive on. It was also meant to assist Prasa rail infrastructure.
But…
Increased VAT means basic goods get more expensive! The finance minister said yes, yes, he knows that, and that is why they would increase the social grants and increase the list of basic goods that are zero-rated, which means no VAT is paid on them. This is like certain food items, like specific meat cuts and tinned food.
Here's the problem:
Some people don't believe raising VAT will increase South Africa's revenue. The ministers in the GNU that opposed it argued that life is already way too expensive in South Africa, and poor people can't be burdened more. Now, the finance minister has gone back to the drawing board to figure out where he can get more money from. That is definitely an unenviable task.
Is There a Better Alternative?
To gain expert insight, I spoke with Khaya Sithole, a chartered accountant, activist, and columnist, to explore whether borrowing could be a viable alternative to increasing VAT. I asked him: Is there any way we can borrow more money, and if we can, what are the consequences?
Let's not forget that South Africa owes a TON of money. Our debt-to-GDP rate is 76%, which is way above the world average. In other words, for every R100 the government collects, about R21 is spent only on the interest of the loans we have! Sithole explains that while borrowing is always an option in capital markets, the real issue is cost.
"There's definitely a way to borrow more money. In capital markets, there is always someone willing to lend you the money. The problem is that because you are in junk status, and owe too much and don't generate enough taxes, plus the political position to not increase taxes, it simply means that whoever is willing to lend the money will do so at a very expensive rate.
So if your rates are more expensive, it means that whatever you borrow is much more expensive, and future generations have to pay for it. But current generations also suffer from it because the interest costs are due immediately, and those interest costs that you have to pay on an annual basis then actually get prioritised because they are based on binding contracts. You cannot opt to pay in one month or one quarter. So interest is due, unlike other discretionary items that politicians can decide on.
So once you start borrowing more, you're simply going to have less to spend on services that you want to prioritise. So it's a trade-off that you have to make, and South Africa has reached a stage where they feel that trade-off has become too expensive. So, therefore, they no longer want to explore it."
So then, why doesn't the government just increase the taxes of the wealthy instead of raising VAT as a simpler solution?
A growing argument is that instead of raising VAT, the government should tax the wealthy more heavily. But according to Sithole, this solution isn't as straightforward as it seems.
"The essence of what a wealthy taxpayer is is not well defined at this stage. Currently, we have taxpayers who pay a 45% income tax rate, and those taxpayers have a tax wealth income of between 1- 1 ½ million rand on average. So if you look at the numbers of people that fall within that particular bracket, the number of them to make a significant impact is quite simply unknown, and the reason for that is the data is not known.
When a wealthy person completes their taxes, they do not need to state their passive assets or assets that did not generate any income. For example, if you have a R10 million house, that’s just that—it has no tax implications until you sell it or if you rent it out in any generatable tax income.
So, in the absence of data that tells us how many people are indeed wealthy, we would not know what the taxes would be. So it's not something you simply do in the hope that there is going to be money that materialises; it simply just doesn’t work like that.
South Africa's got a concentration problem in the sense that there are very few people at the number anyway, and the thing about wealth taxes is that they're probably not recurring taxes. So if you decide to tax people on their wealth, there is a high chance that they would move their assets offshore to avoid recurring taxes.
The big problem is a lack of data; we don't know how many wealthy people there are to know if a tax like this could make a difference at all. So that's a big problem. We don't have a model for wealth tax, and we don't know the value of what that extraction might be."
Cost-cutting seems to be the only solution
Everyone agrees that government spends too much. And that more than trying to earn more money, maybe government should relook at its spending habits.
The DA says the money government needs can be "easily sourced from failing, failed and underperforming programmes and sub-programmes". In other words, why must the state burden poor people with a higher cost of living when it wastes money on unnecessary advertising budgets, massive travel costs, and, of course, let's not talk about catering costs!
It is a tough balancing act. We hope when the budget is eventually announced, South Africans will be given some respite.
Zoë Thomas is a writer and Social Media Strategist currently completing her Masters in journalism.