Picture: 123RF/iwat1929
Picture: 123RF/iwat1929

Finance Minister Tito Mboweni’s budget is built on two fundamental assumptions. The first is that given the precarious nature of the economy, any significant tax increase would, in the short run at least, depress further economic growth. The second is that the deficit could be maintained within acceptable boundaries if the public wage bill is reduced over the next three years by R160bn.

The first assumption is the least controversial. The economic structure inherited from apartheid luminously reflects the gross level of inequality that has not improved in any meaningful way since 1994. For the purposes of tax policy, that means SA’s tax profile resembles a pyramid: of 13.8-million taxpayers, only 308,000 make taxable income of more than R1m and only 125,000 make taxable income of R1.5m or more. In all, 40% of income tax is paid by these people.

This doesn’t mean that most people pay no tax: all South Africans pay tax, particularly VAT.

The critical point, though, is this: the only tax increase that can produce significant revenue is a VAT hike — but it’s a retrogressive tax.

Sure, hiking the maximum marginal rate of tax for the top two tiers would increase revenue, but by no more than a third as much as could be raised by a one percentage point VAT increase.

Of course, SA could consider a wealth tax. It would improve the legitimacy of the current system. But the evidence is that a wealth tax wouldn’t raise enough revenue to stanch the deficit flow either.

Thus, today, there is little scope for the sort of tax increases that would solve the deficit problem. This means only two options are available to increase tax collections in a meaningful way: either increase economic growth, or improve tax collections.

On the first of these, the prognosis isn’t good. Depressingly, the budget projects tepid growth over the next three years: 0.9% in 2021, 1.3% in 2022 and 1.6% in 2023. That’s hardly the sort of growth that will either produce major revenue, or reduce the horrific levels of unemployment. In fact, the budget provides little indication as to how the economy will grow at more than 2% — let alone the 5% needed to vindicate the constitutional vision of a society based on freedom, dignity and equality.

SA’s debt compounds the problem. The cost of servicing that debt is R229bn this year; it’s the fastest-growing expenditure item. This huge hole gainsays the arguments of economic populists that more spending, without any meaningful cost-cutting, should have been the order of the budget.

At least R50bn in tax could be collected if Sars focuses on tax evasion, VAT fraud and transfer pricing

On the cost-cutting, there are other questions. For example: why, with so little revenue available for services like education and transport, is there an imperative to start a sovereign wealth fund with money from mining royalties, which would otherwise flow into the fiscus? Why start a state bank, when you already have Postbank?

But central to the cost-cutting is the second assumption: that by cutting the public service wage bill, we can keep the deficit in check.

Now, the odds of successfully cutting civil servants’ wages is obviously a political question. But for it to happen, the government will need to strike a deal with the unions. Perhaps they ought to study the biography of Margaret Thatcher before they start.

But there is a deeper question here too: to what extent can the government succeed in cutting costs without compromising the quality of public services such as schools, police and public health?

Those who oppose reducing the wage bill do make one unanswerable point: the workforce neither initiated nor benefited from the corruption that brought state entities such as Eskom and SA Airways (SAA), to their financial knees. And no significant participant in state capture has been charged. Until that happens, the argument that the cost of state capture has been placed on the shoulders of workers will continue to have wide traction.

In all the budget analysis, a key area received little focus: the plan for improved tax collection.

The Budget Review provides some hints about how this will be done. This includes proposals for legislative amendment to curb tax abuse — such as interest deductions and transfer pricing, as well as limiting assessed losses.

Actually, in the current climate, improved tax collection is manifestly the best way to boost revenue. In an article I wrote in December, I suggested there was at least R50bn of tax that could be collected if the SA Revenue Service (Sars) concentrated on customs, VAT fraud, transfer pricing and the high net worth individuals who engage in tax evasion.

Under commissioner Edward Kieswetter, Sars has begun to recover from the degradation of its capacity, which was detailed by the Nugent commission.

Its ability to close the tax gap is improving all the time, so it’s likely that the amount of tax evasion and fraud will be reduced this fiscal year.

This would help ensure that, even with tepid growth, SA’s public finances may yet exceed the prognosis that appeared in the budget. Fingers crossed, of course.

Judge Davis, a professor of law at the University of Cape Town, chaired the Davis tax committee