South Africa has run out of money – and options

South Africa is facing a severe budget shortfall, and with a stagnant, over-taxed tax base and massive debt, the government has run out of ways to raise more money.

This is the warning from the South African Institute of Taxation CEO Keith Engel, who told Kaya Biz that South Africa’s tax base is not growing.

This becomes a problem as the government’s expenditure is growing. “So the problem is they’ve got to keep up with that, but we have had low to no growth for a long time,” he said.

“What’s happened is we’ve run out of options. South Africa can’t increase its taxes anymore because to tax people more is actually to reduce the economy.”

“So the best way to get tax revenues is to grow the economy that seems to be stalled for years and years.”

Engel said South Africa has expanded its tax base as much as it legally can. 

South Africa’s tax revenue comes mainly out of personal income tax. While corporate income tax is also a significant source, it is very volatile, Engel explained.

“As growth shrinks, the first thing that gets hit is the corporate tax so that when you’re not growing, you’re not going to get enough money out of it.”

Therefore, if the government wants to increase its tax revenue, “the best place to go is either personal income tax or value-added tax (VAT)”.

However, raising personal income taxes is not viable, as “at 45% top rates and the marginal rate kicking in so low, you’re actually just stripping the middle and the lower middle for the poor”.

Raising VAT is also a “politically unpalatable” option since it would affect all South Africans’ pockets. “If you raise VAT, you kill the growth even further. So that’s not much of an option,” he said.

In addition to maximising its tax revenue, the country has borrowed nearly as much as possible, and the government’s debt servicing costs have become increasingly expensive.

While the country has experienced high inflation, which helped boost revenue, it is not a sustainable source of income for the government.

“So, really, there are very few choices left for both government and the taxpayer.”

Engel said this complicates discussions between the National Treasury and the President about whether to continue funding the country’s social relief of distress grant or implementing a basic income grant.

“The difficulty with grants is that they’re annual – not a once-off thing. So you can’t go raiding one pot or another to get there,” he said. “You need a perpetual income stream, which is now gone.”

Engel said the only way to fund new projects is to cut government expenditure. However, “if you cut one expenditure, that hurts one part of the economy in favour of another.”

He said that if the government wants to change its spending priorities, it must be very careful.

“It’s about shifting priorities. It’s not about really cutting, nor is it about raising taxes,” he said.

“If they want to do something, they’ve got to cut waste in this government: The state-owned enterprises. That’s where they have to cut, and they are unwilling to do that.”