The South African tax year stretches from 1 March to 28 February of the next year (except for companies that are granted permission for their tax year to coincide with their financial year). February can thus be seen as tax season for most, as it is time to start your preparations for the tax returns that are due soon.
There are various types of taxes in South Africa, and each and every individual or business groans at the idea of the amount of money that must be paid over to government in the form of tax. This situation is, however, not unique to our country as most other countries also make use of tax contributions to fund the government and public services.
Yet the problem that most people have with tax payments in South Africa is not the payment itself, but rather the way in which you hard earned money is spent by government. Even though it feels as if tax rates increase each year, current government debt is growing even faster (Figure 1) and caused the South African government to earn a junk status credit rating.
SA government finances
The government’s finances work like that of any business or individual. They receive income (revenue) and then use this income to cover government expenses. In cases where their expenses are more than the revenue received, the government has to borrow money from external sources to make up the difference.
When we look at the country’s debt over the past ten years in Figure 1, it is clear that the expenses often exceed the revenue as the debt, as percentage of the gross domestic product (GDP), has kept on increasing since 2008.
The increasing debt levels will at some point cause the debt to become unserviceable, and it is due to this reason that some of the international credit rating agencies consider South Africa to no longer be an investment graded country. The only way to get out of this predicament is to either increase government revenue or decrease government expenditure.
On the revenue side, the government generated R1,35 trillion in 2015/16. For every rand of revenue generated by the government, 86 cents were received in the form of tax. Personal tax contributed 29c, VAT contributed 21c, businesses 16c, excises 10c, and other taxes also 10c.
Government spends money on a wide array of goods and services, all of which are reflected in Stats SA’s summary of spending of R1,52 trillion for 2015/16 (Figure 2).
Figure 2: Government spending in 2015/16. (Source: Stats SA, 2017)
A few alarming figures
The breakdown of government expenses shows a few alarming figures, the first of which is the fact that more money is spent on servicing debt (9%) than on many of the other functions. The most important priorities for the government is education and social protection, which together consumes 32% of total spending. Agriculture is very low on the list at 1%.
When one takes the total amount of spending and divides it through the population of South Africa (54,96 million in 2015), the government spends around R27 600 per person.
The most alarming figure in respect of government spending, is the large sum used for compensating government employees. A total of R1,37 trillion is non-capital expenditure and 40,6% thereof is used to service the government payroll.
When compared to other industries, one realises how much money government forks out for its employees – the mining industry allocates 18,5% of its expenditure to employee compensation, while construction allocates 17,4%, transport and communication 16%, manufacturing 10,8% and trade 8,2%.
Improving the financial situation
As mentioned before, government should either increase revenue or decrease expenditure in order to service its current debt and to refrain from increased borrowing. Of the two options, the current government will most likely prefer to increase the revenue received, as it is rather difficult to cut back on expenditure.
Since the largest proportion of government revenue is generated through tax, the easiest way to increase revenue will be to increase tax levels. Personal tax and VAT already contribute the lion’s share to total revenue, and although it will be the easiest route to increase these taxes (especially VAT), the burden may become too heavy for consumers. Comparing the contribution of the other types of tax, it seems as if there is more room to make the burden on business heavier.
The problem with increasing tax rates to improve government revenue, is that there are no guarantees that, for example, a 10% increase in a tax rate will bring 10% more money to government’s coffers. South Africans – businesses and individuals – are actively seeking more ways to avoid paying tax (save on tax payments), as they know that they do not really reap any benefits from the public sector.
Another problem with the current tax system is that there is no control over the new crypto currencies (Bitcoin and Ethereum) that are gaining in popularity. An increasing number of individuals and businesses are starting to use these as payment and accepting it as payment, and since it does not form part of the banking system, the government has no control over these sources of income.
Because it is unlikely that an increase in taxes will be a foolproof way of ensuring a higher revenue for government, they will have to start cutting on their expenses, and salaries should be the first place to start.
Food for thought
It seems as though tax is going to become a smaller contributor to government’s revenue coffers, as economies expand into the digital space and individuals and businesses start to find more ways to save tax.
Although you should think of yourself as being in a privileged position when you pay tax, the wrongful spending of government causes people to rather buy unnecessary inputs or make capital outlays than pay tax.
In my opinion, your tax will not save South Africa from its current financial predicament, and I am waiting in anticipation to hear just how the minister of finance will attempt to solve this problem with his budget speech later this month. – Frikkie Maré, University of the Free State
For more information, contact Frikkie Maré at MareFA@ufs.ac.za.