Here are the facts about South Africa’s Budget:

For the past 15 years or so, the government has consistently spent more than it has collected in taxes, creating what is becoming an unsustainable level of debt. There is no per capita growth (population is growing faster than gross domestic product (GDP).

In the short term, taxes have to be raised. Anything else will take too long to make an immediate difference, although all the growth stuff should happen too.

Let’s stop messing about and temporarily increase VAT to 17%. Serious. VAT is a very efficient tax collector and if the VAT exemptions are significant enough, which I think they are in the proposed budget that none of us have seen, then I don’t think the most vulnerable will be hit too hard.

The beauty of a temporary increase is we can deal with the politics once for (say) the next five years instead of every year. To lock this in, we want a legislative amendment so that politicians under pressure are not tempted to renege on their word. I know this is hard to believe, but sometimes it happens. Even in South Africa. And yes, I know they can still change it, but let’s not make it easy.

The VAT increase could be connected to fiscal targets, which if not met, see the VAT rate drop by one percent for the first year the target is missed and by another percent the next year and then we are back to 15%. This would function as a fiscal anchor, but with a penalty if the targets are missed. You would think the politicians would be encouraged to let the slippage happen and the VAT to drop, but we are now governed by the Government of National Unity (GNU). We are also bankrupt and I have to think it is easier to bite this bullet once politically, than every year for five years. I hear the gasps, but let me explain why I think this could work.

The problem with South Africa’s Budget is not that National Treasury doesn’t employ enough economists who can run fancy models, it’s that those economists are over-focused on the revenue side of the equation. In other words, the expense side, which is set by politicians, is mostly beyond the control of Treasury.

They can’t, for example, stop subsidising the automotive industry or prevent municipalities from failing. No matter how many times they say National Health Insurance (NHI) is a bad idea, they can’t do anything to stop it being implemented. The Minister of Finance periodically has a stern word with a wayward State-Owned Enterprise (SOE) before providing them their last bailout and then their absolutely final bailout.

Treasury’s job has been reduced to deciding which tax to raise by how much. South African Revenue Service (Sars), who has to collect the taxes, we now know is largely ignored (make sure that mic is off, Minister Godongwana, before you put the Commissioner in his place). Edward Kieswetter is sort of a living Laffer Curve (LLC), with a keen sense of when the tax rates are too high to collect the money he is legally mandated to secure. When he says it’s not likely to be collected, he should be listened to.

I don’t know what the conditions for the temporary increase should be, but here are a few ideas:
No wage increases for government employees above the Consumer Price Index
.
Reduction in people who are allowed blue light brigades and general reduction in spending on bodyguards.
No further SOE bailouts.
No more biscuits with fillings or coatings. Only Marie Biscuits, served with Frisco coffee and Cremora.

And so on, giving a good compromise to everyone in the GNU. The absolutely essential tax increase is granted, but with a limited lifespan. Fiscal discipline gets locked into the process, because deviation from the discipline has measurable and immediate consequences, and it is easier to sell this to society because it has an end date.

Tax increases tend to get locked in, even those which barely increase revenue or sometimes reduce it, like the Diamond Export Levy and the increase in the marginal income tax rate of a few years ago (all preceding the LLC, you might notice). If you give people a promise that they will have to dig deep for five years but after that will see relief, the large and very bitter pill will be easier to swallow.

As the Buddha famously never said, “This too will pass. Like a kidney stone, but it will pass.”

#sa

South Africa's Budget crisis: could a temporary VAT increase be the solution? - Donald MacKay