The finance minister has almost no scope to hike personal income tax rates any further in the budget and will have no choice but to increase the (value-added tax) VAT rate from 14% to 15% to close the revenue gap, PwC tax partner Kyle Mandy said on Wednesday.
Mandy is one of a growing number of tax experts predicting that the VAT rate will be hiked, despite the opposition this could cause, and that the finance minister may use the need to fund free higher education as a rationale for raising VAT for the first time since the early 1990s.
Latest monthly figures confirm revenue is likely to fall R50bn short of target this year, in line with the Treasury’s October forecasts; government has already said the finance minister must find R30bn in tax hikes, as well as deep spending cuts, to get the budget back on track, and this even before taking into account the more than R12bn cost of the free fees measures.
It’s unclear at this stage who the finance minister will be by next week, given that a no-confidence vote would require the appointment of a new Cabinet, but Parliament confirmed on Wednesday that the budget will go ahead as planned on February 21, after the state of the nation address on Friday.
Government revenue is now 26% of GDP, back at pre-financial crisis levels but it has stalled in the past three years, despite increases in tax rates, and this probably reflects a deterioration in taxpayer behaviour and in the performance of the South African Revenue Service.
A one percentage point hike in VAT would raise R22bn in extra revenue, though it is expected that the government would compensate poor people by giving R2.5bn-R3bn of relief through higher social spending.
Though economists see VAT as the optimal way to raise revenue, many believe that’s not politically possible. Standard Bank’s chief economist believes there is only a moderate probability of a VAT rate adjustment.
Economists expect the finance minister will once again derive some of the extra revenue he or she needs by providing limited or no relief for fiscal drag — so not compensating individuals whose inflation-related pay increases put them into higher tax brackets.
Mandy calculates that giving no relief at all for fiscal drag would raise R17bn.
However, it is not clear whether the government will look to personal income tax for even more revenue, after the maximum marginal rate was upped to 45% last year.
Mandy says individual taxpayers now contribute a record 10% of GDP, a level last seen in 1999-2000, with the significant reductions in personal tax rates which the government provided in the early to mid-2000s now entirely reversed.
Mandy does not expect that in the current environment there is room for further significant burdening of individuals, especially given that the burden has fallen increasingly on high-income individuals, with the top 25% of individual taxpayers contributing 80% of personal income tax.
However, "wealth taxes" such as capital gains tax and estate duty could be increased.