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Taxing times

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Taxing times

17th July 2015

By: Terence Creamer
Creamer Media Editor

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With tongue firmly in cheek, political commentator JP Landman empathised strongly recently with an audience of mostly male professionals for having to bear the infuriating insistence of their fathers-in-law that the entire country was being kept solvent by a small group of only five-million, increasingly put upon, taxpayers.

“I know you can’t tell the old fart that he is an old fart, because you want to be in his last will and testament, so you’ve got to swallow what he says. “But the fact is, he’s talking rubbish,” Landman quipped. The domestic tax base is, in fact, far more broadly based, with 65% of South Africa’s revenue being derived from indirect taxes, “which are paid by everybody”.

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His comments came as the Greek crisis – brought upon partly by a lack of tax compliance and enforcement – was reaching a crescendo, causing more and more South Africans to question the implication of rising public-sector debt for the country’s own financial sustainability.

The good news is that one of the strengths of the democratic era has been government’s adherence to macroeconomic prudence, supported by a revenue-collection system that is now as much respected as it is reviled.

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The bad news is that South Africa is no longer enjoying the levels of economic growth that were so effective, prior to the global economic crisis, in hiding its structural deficiencies. Unhappily, we now have to confront some of these head on, as the economy battles to grow at levels of better than 2%.

The macroeconomic implications of this slowdown are profound. It places downward pressure on tax revenues, prolongs Budget deficits and leads to higher borrowings and interest payments. In other words, the sensitivity of the national debt to growth is high.

For instance, using an economic model that assumes a primary government deficit of 2% of gross domestic product (GDP), a real interest rate of 2% and growth of 1.5%, South Africa’s national debt would rise to 60.3% of GDP by 2025, from less than 50% currently. By contrast, should a growth rate of 4.5% be achieved, national debt would be 51.3% of GDP by the same date.

But, in the absence of higher growth and fiscal consolidation, the only way for government to sustain its various spending programmes will be to raise taxes, which brings me full circle to the issue of taxation.

Government has already moved to raise personal income tax, but Judge Dennis Davis and his Davis Tax Committee have indi- cated that even more could be required. Political considerations will no doubt play a significant role in the eventual determination. But, hopefully, government’s choice will not serve to further weaken the real golden goose: growth.

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