In the end, it turned out that the 2018 budget was a prisoner of the economic and political conditions created over the past few years. The tepid levels of GDP growth, astounding levels of corruption, declining tax morality and turbulence in the SA Revenue Service (Sars) all combined to create a revenue shortfall that has created fiscal unsustainability.

If you recall, back in October when finance minister Malusi Gigaba delivered the medium-term budget policy statement, the revenue shortfall was calculated at R50.8bn — and that did not include the added expenditure needed to fulfil former president Jacob Zuma’s cavalier pledge of free tertiary education.

This week’s budget showed that the R50.8bn has been revised down to R48.2bn. To fill this gap, national treasury needs extra tax revenue of R36bn, as well as a commitment to prune government expenditure by R85bn over the next three years.

It may be controversial that a one percentage point increase in Vat is the centre of the tax increases needed to fund this shortfall, but it’s hardly surprising. After all, where else would Gigaba have been able to source a predictable R22.9bn?

At 28%, corporate tax is already fairly high, and in a globalised world in which SA is seeking new investment to power its growth trajectory, an increase would have proved economically counterproductive. And besides, we need reliable information about the gap between nominal and effective corporate rates of tax before any corporate tax increase could be justified.

While personal income tax rates remain unchanged, the partial implementation of fiscal drag does represent a modest effective tax increase for higher earners.

But even if the marginal tax rate were increased from 45% to 50% for people earning more than R1.5m/year, it would raise revenue by less than R5bn — hardly a replacement for a Vat increase when the country needs to raise more than R20bn.

The reality of SA’s economy is that the pyramid shape of income distribution — itself an unwelcome product of our racist past — imposes an inherent constraint on our ability to raise the sort of revenue needed to plug the shortfall through any hikes to personal income tax.

Of course, some attempt has been made to target the wealthy in this budget through an increase in estate duty. But the fact is, unless tougher anti-avoidance measures are implemented, along the lines recommended by the Davis tax committee, little will come of this increase.

The one percentage point increase in Vat may be controversial, but it’s hardly surprising

While it’s doubtful that estate duty could ever make a really major contribution to revenue, it must still be taken seriously in a country with the sort of egregious levels of income and wealth inequality that we have in SA.

The Davis tax committee has completed a report on wealth tax, but implementation of the proposals requires significant additional information about wealth patterns and a comprehensive discussion of its scope.

For example, does wealth situated in retirement funds — which, on any plausible definition, make up a significant part of SA wealth’s landscape — fall within the scope of a wealth tax?

As you’d expect, the budget places much-needed emphasis on tax administration. Tax buoyancy is now below 1 — a measure that illustrates how revenues have fallen below the rate of GDP growth in the country.

The Budget Review suggests that the decline in the dividend tax collection — by more than R5bn from what was projected last year — is a significant factor in that buoyancy rate. That is true, but concerns with the state of Sars could also have been a contributing factor.

The problems at Sars are one of the early issues that President Cyril Ramaphosa needs to fix.

On balance, Gigaba’s budget will doubtlessly be remembered as the one in which Vat was increased for the first time since 1993.

Some have argued for a three-tier Vat system: a luxury Vat tier for a certain range of products; a zero-rated tier for essentials like bread; and the normal tier, which will now be 15%.

The answer to this is that creating a luxury Vat tier would require significant legislative work to define what constitutes these items. That legislation would take time to put together.

Second, a three-tier Vat system creates opportunities for arbitrage (on the input side), which makes it inefficient and difficult to administer. Also, increasing the scope for a "zero rating" means the revenue that is foregone mainly benefits the wealthiest people.

It is far better to redistribute on the expenditure side — such as the increases to social grants announced in this budget, as well as the increased spending on tertiary education for the poorer sections of SA.

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