Finance Minister Pravin Gordhan presents his medium-term budget policy speech to Parliament in Cape Town last year. Picture: EPA/NIC BOTHMA
Finance Minister Pravin Gordhan presents his medium-term budget policy speech to Parliament in Cape Town last year. Picture: EPA/NIC BOTHMA

South Africans will soon learn how much more of their disposable income and wealth will be extracted to sustain the nation’s credit rating. They have been forewarned, though they do not appear forearmed, to resist the incoming tide of still more tax and less income to spend. 

They will be told, correctly, why limiting the borrowing requirements of the government (the fiscal deficit) is essential for holding down interest rates and the cost to taxpayers of servicing the debt (old and new) incurred on their behalf.

What will not receive much attention from the minister of finance is a recognition of the influence of taxes and tax rates on the ability of economically active South Africans to pay these taxes – so that tax rates have to rise even as the economy continues to flirt with recession.

Evidence of policy failure, in the form of persistently dismal growth in South African incomes, is there for all to recognise. The rating agencies have identified the lack of economic growth in South Africa – and so of its tax base – as a long-term threat to the solvency of South African government debt.

It is not good economic policy to tax some goods and services at a much higher rate than others. Nor does it help to subsidise more favoured (by politicians and officials) sources of income. The economy needs less of both taxation and subsidisation that can significantly alter the patterns of consumption and production – interventions that prevent prices and output from revealing the economic value of the resources used in production and distribution. Transport and energy costs, including the particularly adverse taxes on fuel and energy, have a large influence on the prices of everything consumed and produced in South Africa.

It is a mystery why South Africans appear so complacent about the ever-higher specific taxes levied on their demands for transport and energy, yet are so defensive of the inviolate 14% value-added tax rate with all its significant, hard-to-justify exemptions that help the better-off more than the poor.

Sugar tax leaves bitter taste

The Treasury is now considering a tax on sugar added to soft drinks. It’s looking to add as much as 20% to the price of a litre of the offending liquid and, not co-incidentally, hopes to produce significant additional revenue. This focus on extra revenue will deflect attention from the full, perhaps unintended, consequences of such penal taxes: that is, not only less sugar consumed but also added incentives for producers to avoid taxation – both the sugar tax and all the other taxes that accompany the production of soft drinks.

This has been the case with cigarettes, where highly penal tax rates have driven much of their production and distribution underground. When the price of a cigarette is cheaper on the street than in the supermarket, the practical limits of the ability to tax and to influence the prices charged have been exceeded.

The way forward is for the government to spend less, especially on the benefits provided to the nannies employed by an increasingly nanny state, who thrive on an ever-growing but largely dispensable tide of regulation that inhibits production and employment. The full costs, as well as the often marginal benefits of a regulation, need to be better recognised.

The government also needs to recognise the cost savings, were the private sector allowed to deliver more of the services that taxpayers fund, including education and hospital services as well as electricity and transport. And it should look to sell off the assets of these superfluous state-owned enterprises (SOEs) to reduce government debt and interest payments that the SOEs have been so assiduously adding to, given their poor operating results.

South Africans should fully recognise that ever-higher tax rates are not helpful to their economic prospects. They should be calling loudly for less government, less spending and less interventions by government. This would lead to lower tax rates, faster growth and indeed more revenue collected. 

Investec Wealth & Investment advises many of South Africa’s foremost families, trusts and charitable foundations in the preservation and appreciation of their wealth. Click here for more information.

Brian Kantor is chief economist and strategist at Investec Wealth & Investment. The views expressed in this article are those of the author and may not necessarily represent those of Investec Wealth & Investment.

This article was paid for by Investec.

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