Hiking VAT stood out as the least fractious revenue raiser for a basic income grant (BIG) in a new study commissioned by SA’s most prominent business lobby groups as they weigh in on a proposal that has polarised economists and policymakers.
The 64-page report, conducted by research house Intellidex on behalf of Business Unity SA (Busa) and Business Leadership SA (BLSA), is the latest to make a forceful contribution on the proposal, which has become a recurring feature of welfare debates after the July 2021 protests morphed into a violent outpouring of anger over hardship, record high unemployment and inequality.
The report said the government could, in theory, fund the programme via an increase of just more than two percentage points in the VAT rate from 15% to 17% to raise at least R50bn in new revenue. That is more or less what the government spends on the R350-a-month social relief of distress grant, which was introduced as a temporary measure in 2020 but which is proving difficult to take away.
SA raised about R350bn from VAT in 2019 — the year before the pandemic and commodity price boom — making it the second-biggest revenue earner after personal income tax, which brought in nearly R530bn, and ahead of corporate tax receipts at just over R200bn.
Out of all the options available, VAT emerged as the least distortionary and would move the country closer to the rate other developing countries charge, according to the report titled “What funding options are possible for BIG?".
But the move risks stoking inflation and it is likely to be rejected by politicians for its regressive feature, not least because the country is heading into the 2024 elections with predictions that the ANC’s electoral support will show further declines.
Alternatively, according to the report, the government could raise at least R50bn in new revenue by sharing the load between all three big tax instruments. It would be a punishing and potentially growth-sapping option that would require an average increase of 5% on the rates of all three tax types in the country, raising personal income tax by 1.2 percentage points for each bracket, and upping corporate income tax to 29.5% and VAT to 15.75%.
“While it is possible to raise taxes to levels that would generate significant new revenues, the real question is whether it is wise to do so,” said Intellidex’s Peter Attard Montalto, the lead analyst. “The combination would almost certainly mean that even if the absolute value of new taxes raised was large enough to
cover the full costs of a BIG, there are good reasons to worry that doing so will slow growth sufficiently so that the debt ratio will rise even if the borrowing requirement does not.”
The report comes in the context of President Cyril Ramaphosa appearing to be do little to quell critics who frequently call his approach to social and economic ills “rudderless”. Former president Thabo Mbeki last week issuing a blistering rebuke on the president’s failure to come up with a coherent plan to tackle the country’s social troubles.
Mbeki’s comments may put pressure on Ramaphosa to quickly lay out an agenda on jobs, the economy and poverty — the three projects central to shaping his legacy as head of state.
“There is so much at stake when it comes to the BIG and decisions must be based on meticulous research into how it would be funded,” said BLSA CEO Busisiwe Mavuso.
But the reality is that the government does not have much room for additional spending, and so whatever amount is approved and why it is chosen is exceptionally important, said Cas Coovadia, CEO of Busa.
“This of course is not to say that the proceeds of reform and future higher potential growth causing the tax base to expand cannot be spent on the social wage — including even a BIG if that is the political choice. One must be realistic, however, on when such tax base expansion will credibly happen,” said Coovadia.
Executive director for the Centre for Development and Enterprise Ann Bernstein said that the BIG is not affordable because the government’s finances are already unsustainable.
“A BIG would be a reckless and losing gamble with history. SA needs cool-headed leadership to implement policy challenges that will result in sustained economic growth,” said Bernstein.
That is an assessment shared by Intellidex, which summed up the debate as “whether it’s best to jump out of a burning building from the 10th or the 20th floor. While you might make a bit less mess from the 10th floor, the outcome is materially the same. Another approach is required.”
Correction: July 26 2022
This article has been updated to correct Ann Bernstein's name from Anne.
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