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The political budget crisis and alternatives to austerity, Part Two


Dick Forslund is senior economist at the Alternative Information and Development Centre, which produces the activist magazine Amandla.

It is because of self-imposed serfdom that the Treasury has to say, twice, in its Medium Term Budget Policy Statement document, that its “central fiscal objective over the medium term is to stabilise the growth of debt as a share of GDP”.

In the first part of this article we suggested a “tax bracket freeze”, as the single most important measure to be taken in the upcoming fiscal year to address the #FeesMustFall campaign. In this, part two, we set out further how government could be budgeting to address South Africa’s socioeconomic reality. This is something, to date, the Government and Treasury have failed to do, and as a result have failed to demonstrate that they are raising, and using the available resources, to budget for not only the students’ education, but the broader needs of South Africans.

As a reminder, a “tax bracket freeze” would yield approximately R10 billion in revenue for the 2016/17 financial year. Every year that this “bracket freeze” stays in place, gains in revenue would be added to the public purse. The second year of bracket freeze would yield more than R20 billion. In the third year, the addition would be well over R30 billion. Over three years, this measure alone, would pay for all student fees.

To further increase revenue the Treasury could reintroduce the 45% tax bracket for incomes above R1 million. It would yield R5-6 billion (based on the 2014 Tax Statistics). An important point must however be made about our millionaires. In 2013, there were about 4,200 individuals registered for an income of R5 million or more. Their average income (3,337 tax forms assessed) was R9.5 million, and the tax they paid was R3.7 million per person. Cap Gemeni’s “New World Wealth” 2014 report estimates that there are about 48, 800 High Net Worth Individuals (HNWI) in South Africa. A HNWI has an income of more than R7 million, or R70 million in accumulated wealth. If only 10, 000 of these HNWIs paid income tax like the 3,337 income millionaires did in 2013, instead of hiding outside the tax system, this would yield an additional R37 billion in tax revenue.

A bracket freeze in the present 2015/16 budget would have meant a mere R44 to R72 in additional tax to be paid, per month, starting from R74, 650 per year – under which no Personal Income Tax (PIT) was paid in 2014/15 – to some R500, 000 in taxable income per year. It is not difficult to mitigate this cost for employees who earn more than R6,100 per month, and pay PIT.

First, if we let the reversal of a decade of political tax cuts pay for higher education, formally employed parents who pay fees for their youngsters will, of course, gain because they will no longer have such a cost to pay. Second, for others, and for all whose income is too low to pay PIT, the scandalously amassed surplus of over R70 billion in the Unemployment Insurance Fund (UIF) could be used by scrapping the 2% tax on wages up to R14 000 per month for four to five years, depending on when the UIF managers get their house in order. The fund should start to pay back the money to tens of thousands of unemployed workers, who demand their unemployment insurance, but are denied it by lethargy and maladministration. The UIF has funds of over R150 billion and, again, an idle surplus of R70 billion, despite an official unemployment rate of 25%.

A proposal like the one above, temporarily limiting the UIF to a payroll tax up to R1000 in wage per month, was in fact put on the table in the 2015/16 budget, but rejected in NEDLAC by both labour and business, for reasons unknown to us.

The measure would soon give an injection of more than R15 billion to working class consumption per year, corresponding to the full 2% UIF fee. Like any payroll tax, the 2% UIF fee and the 1% Sector Education and Training Authority (SETA) are paid entirely by the workers, even if the employer formally pays half of it (UIF) or all of it (SETA). What the employer pays in payroll taxes, is fully discounted in wage negotiations. Economics students know this after having studied “the incidence of a tax”. Trade unionists involved in wage negotiations also know it.

For this reason, we question the honesty of the call for “the private sector” to pay a separate tax to education. It is very hard to believe that this government will increase the present 28% tax on profits. Whether it is a new, and separate payroll tax or an earmarked increase of the SETA levy that is on the table, which seems likely, it is not a “tax the rich” measure. It will be a tax on all the formally employed, no matter how low their wages are. As long as there are obvious alternatives available that really “tax the rich”, and the wages of the vast majority are terribly compressed, those alternatives must of course be pursued.

We have focused on personal income tax to show what is immediately possible in February, if there is political will, and also to stress the individual responsibility of those citizens who are able to pay, do so for the well-being of all. Here is critical to address the question of increasing Value-Added Tax (VAT), as a source of raising revenue. It is suggested that an increase of 1 percentage point would yield another R15 billion. However, VAT takes a larger share from the incomes of poorer households than from the incomes of wealthy households. The Mini-Budget speaks about approaching changes in taxes “with caution”, but the Treasury makes it clear that an increase in VAT is one suggestion on the table.

The student rebellion against the fee increases gives “caution” a new meaning, which perhaps they had not envisaged when they wrote the mid-term policy statement, and should now be in the dust bin. As for a tax on wealth, Stephen Grootes forgot the property rates on residential houses when he discussed the subject on 29th October in the Daily Maverick. This is already a tax on wealth, and it contributes about 20 % to the income of the bigger municipalities. In 2011, AIDC published a short report on what an increase of this tax could give to the City of Cape Town 2010, if the tax rebate on house values was increased from R200, 000 to R600, 000, and the property rate doubled from about 0.55% to 1.10%. Rebates and exemptions for the disabled and pensioners would remain in place, and the result would be over R2 billion in additional resources to the City. The reform would be neutral for house values between R600, 000 and R1 million, and therefore there would be no increase in this wealth tax for such households. Such proposals, on how to get rid of the bucket system, the shack lands and the Special Ratings Areas in wealthier areas, which contradicts the anti-apartheid principle of One City One Tax Base, should be an issue before the local elections.

The dictates from credit rating institutes

We have argued that the R10 billion worth bracket freeze would alone pay for the R2.6 billion shortfall from “0% increase” and for scrapping the registration fee in January. No additional borrowing is needed. Introduction of a new 45% tax bracket for incomes above R1 million would directly create R5-6 billion of additional revenue at the current rate of tax compliance among the rich. This income would grow if South African Revenue Services (SARS) and the Hawks could bring thousands of income millionaires into the tax system, ending their tourist existence in this country, so that they start to act like citizens – from a tax point of view.

So how would credit ratings institutions react to such a “left turn” in fiscal policy? This question applies to anything that the government says or does, and poses the whole problem of the free market borrowing policy practiced by the Treasury. The paradigm imposes on a government that it should meet all borrowing requirement through the “free markets”. When it does so, the old saying “The one who is indebted is not free” applies, and the Credit Ratings Institutions become the Chief Wip. Or, as Karl Marx put it: “The state debt is the golden chain by which the bourgeoisie controls the state”, but even he surely didn’t imagine the power exerted on developing countries by a credit ratings institute in Washington.

It is because of this self-imposed serfdom that the Treasury has to say, twice, in its Medium Term Budget Policy Statement (MTBPS) document that its “central fiscal objective over the medium term is to stabilise the growth of debt as a share of GDP”. The credit ratings institutions are speaking through its mouth. The Treasury only has to puff the air and move the lips and the tongue. To achieve that central objective, the budget deficit is to be brought down from 3.8% to 3% of Gross Domestic Product (GDP), over three years.

If the Budget deficit was allowed to just stay at the present 3.8% of GDP, there would be an additional R22bn available in year one, R28.7bn in year two, and R42.2bn in year three, based on Treasury’s projections of GDP development.

Now, would that make the state debt unsustainable, in the long run? First, this depends on whether the government can be blocked from pursuing its mega project policy, centred on the environmentally disastrous expansion of coal production and mining in general, like the expansion of the Durban harbour (R250 billion). Second, it depends on what interest rate the state is paying, which is why the credit ratings institutes are so powerful. They “set” the interest rates with their credit rating of a state.

The MTBPS shows that the Treasury is paying an average of about 6.8% on the whole state debt. The previous Budget Review reported, however, that interest on long term state bonds can be as high as 8.5% – 8.75%. Now, for ideological and political reasons, the government does not want to borrow anything at a regulated interest rate. However, it should do so from the R1.8 trillion amassed in the Public Investment Corporation (PIC). The government controls the PIC as its single shareholder.

Since its “corporatisation” 10 years ago, the only so called “prescribed asset” that PIC has is the imperative to invest at least 10% abroad. To shift a sizeable part of government’s borrowing to PIC – perhaps at the pace indicated by the yearly borrowing requirement (without reforms increasing tax revenues) of R160-R180 billion three year forward – is an obvious policy option. That the R1 trillion plus nuclear power plans – that will lead to short or medium term financial and long term environmental disaster – is probably crowded out by this move, is a bonus side effect.

Over a three-year period the PIC should be obliged to put, say, 50% of its assets in long-term state bonds that will not be traded. The government would borrow from itself at an interest that secures pensions, as well as social stability and well-being for all, without which it isn’t so fun to be a pensioner in a future South Africa. The size of this prescribed asset is a matter of discussion, and of the effects of tax reforms that structurally increase the tax revenue to GDP at above 30%. Every 0.5 percentage point decrease in the average interest rate on the state debt yields R11 – R13billion per year for the next three year period.  

Considering that there is a three-month window before Finance Minister, Nhlanhla Nene, tables the 2016/17 money bills (Budget), it is enough to say right, now, that in February a progressive government would:

  • Keep the current budget deficit at 3.8% GDP;
  • announce a “tax bracket freeze” to finance higher education;
  • reintroduce the 45% tax bracket for incomes over R 1 million;
  • implement the relief for contributors to the UIF by scrapping the 2% tax on wages up to R14 000 per month for four to five years;
  • keep VAT at its current rate and make text books VAT exempt;
  • shift a sizeable part of government borrowing to the PIC, at a regulated interest rate
  • at local government level, seek to review property rates and tax rebates on residential houses;
  • announce an end to corporate secrecy and promote the “The Right2Know”;
  • announce full public disclosure of the finances of all the daughter companies of corporations in SA, and
  • require that the audited financial reports of outfits in tax havens that receive regular payments from a daughter company in SA be handed in to the authorities by the mother company that owns them both. The Alternative Information and Development Centre has suggested this to the Davis Tax Committee.

Let us see what happens to the revenue from corporate income tax when the scandals start to pile up in the media.

The Treasury, as well as any true opposition, who is not just opportunistically complaining, despite being in agreement with the whole paradigm that has led to this situation, has three months to work on alternatives to austerity. This concerns the demand for free higher education, the crisis in the basic school system, the future of the National Health Insurance, and a range of other issues, like the struggle against outsourcing taken up by the students, now recognised by Wits officials as “an exploitative practice”. Neither should the proposal for a Basic Income Grant, or universal grant be forgotten as a mechanism for supporting those that currently fall outside of the social security net. Everything is linked together in an economy of inequality, mass poverty and economic apartheid.

Finally, Ministers have come out against the principle of universal Free Education. From an allegedly socialist standpoint they say: Wealthy families must pay these fees. Socialists of any strand are of course in favour of a large public service sector, but they should also support cuts in unnecessary administration, and the costly privatisation of social services. Why should people be paid to sit and check tens of thousands of applications, and officially brand students as “poor”?

It is at the tax authorities where more staff is needed, to pursue tax dodgers and to tax rich families after their ability to pay. Don’t let aggressive corporate tax planning and transfer pricing continue because of lack of competent staff. The students demand universal Free Education. “Let the ruling classes tremble” at an alliance between them, the outsourced workers at our learning institutions, and the working class communities that are coughing up fees they cannot afford. DM

Dick Forslund is senior economist at Alternative Information and Development Centre.


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