Future tax hikes are inevitable to fund the huge structural increases in expenditure announced in the 2022 budget, Financial and Fiscal Commission (FFC) deputy chair Michael Sachs said in parliament on Tuesday.
Sachs, who is adjunct professor of the Southern Centre for Inequality Studies at the University of Witwatersrand and former head of the Treasury’s budget office, was speaking at a joint meeting of four of parliament’s finance and appropriations committees.
The FFC and the Parliamentary Budget Office made presentations to the committees on the 2022/2023 budget tabled in parliament last week by finance minister Enoch Godongwana. The budget confirmed the government’s plan to reduce the corporate tax rate from 28% to 27% for years of assessment ending on or after March 1 2023.
“I think we need to have a serious debate about raising taxes because taxes are going to have to go up; there is no doubt about it in my mind,” Sachs said. “Whether we raise taxes through corporate income tax, or VAT, or personal income tax, quite frankly, as far as I can see all three are going to have to go up and it will only depend on what is the balance between those three.
“We really need to have a debate about where that balance needs to be struck, and by how much we need to raise taxes to stabilise our fiscal position and pay for the huge structural increases in expenditure that have been announced in this budget.”
The major expenditure item on the budget was debt service costs, which Sachs noted would increase by about 14% in nominal terms every year over the next three years compared, for example, with the increase in the health budget of 2.3% in nominal terms, far below the inflation rate. Unless this situation was addressed it would get significantly worse, he said. Debt service costs are projected by the Treasury at R302bn in 2022/2023, R335bn in 2023/2024 and R364bn in 2024/2025, averaging R333bn a year.
The issue, Sachs noted, was not about the level of debt but the amount taken out of national income and tax revenue and handed over in the form of debt service costs to foreigners and the wealthiest households in the country.
“There are three ways to resolve this issue. The one is to reduce spending, and I think the programme on the table goes as far as one could conceivably imagine in terms of the reduction in spending. The second way is to raise taxes, and we have not even begun to have a discussion about that. The third is to accelerate economic growth.”
Sachs also highlighted the contradiction between what the 2022 budget proposed and future fiscal objectives.
“My summary comment on this budget is that there is a contradiction between the present and the future. What I mean by that is that if you look on the expenditure side there are very large additions to expenditure in the present (the 2022 budget). We have added R100bn to expenditure, and even last year we added about R95bn to expenditure. But the future, we are told, involves significant cuts to expenditure.
“There is a parallel issue on the tax side where the Treasury is signalling very strongly that the future demands that these structural increases in expenditure be financed by structural increases in taxation — which I think is absolutely correct — but for the present we want to cut taxes. We don’t want to raise taxes on anybody, we want to give people relief for fiscal drag for personal income tax. We don’t want to raise fuel levies and we want to lower the corporate income tax.
“To me, it is rather odd that you would signal so strongly the need to reduce expenditure tomorrow but today you are raising expenditure significantly. And you want to signal also the need to raise taxes tomorrow but today your main preoccupation is lowering taxes.”
In her presentation, FFC researcher Sasha Peters highlighted the R32.6bn allocated in the budget for current bursary holders and first-year students under the National Student Financial Aid Scheme. She warned of the potential risk involved in funding new students, which would create future funding obligations. “Due consideration must be given to government’s ability to sustain this level of funding over the medium term,” she said.
If tax revenue did not recover, the department of higher education & training’s budget would come under severe pressure and could lead to the underfunding of priorities.
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