Deloitte predicts tax hikes in upcoming South African budget

As the spending burden piles up for the South African government, global professional services firm Deloitte anticipates that this expenditure is most likely to be met through tax hikes in a number of areas. The hikes are expected to be announced in the budget speech from the finance Minister, which is due on the 25th of February.

A struggling economy, the weakening of key economic pillars, and increasing costs of production have all put the South African government under considerable pressure. Despite being the second largest economy on the continent, the country is predicted to have a budget deficit of between R50 and R65 billion for the end of this fiscal year.

A major dip in oil prices in 2015 triggered a period of poor economic growth for the country, which was further compounded by a drop in the prices of precious metals that caused revenues from mining to fall as well.

To make matters worse, the country is suffering from a water crisis, exemplified by Cape Town, which is draining government resources in the form of drought-relief. In addition, outgoing President Jacob Zuma announced, late last year, that higher education would be provided free of cost for meritorious candidates, which has placed a substantial burden on the treasury.

Experts from Big Four accounting and advisory firm Deloitte believe that the government can, and will most probably, obtain support to rectify these conditions through tax hikes. Specifically, the firm predicts one of three forms of tax increases, namely: a higher education fund through the revenue service, a hike in Value Added Tax, or the increase of tax on goods such as sugar, alcohol and cigarettes. 

In terms of a higher education fund, Nazeer Essop, a leader in the public-sector department of Deloitte, suggests that the government should create a channel of contribution for people to give to the higher education system through the South African Revenue Services. In order to lend credibility to the scheme, he suggests that it be established under an independent board.

An alternative channel, according to the Director of Indirect tax at Deloitte, Severus Smuts, would be to raise the VAT rate. According to Smuts, a 1% hike in the VAT, without any of the administrative costs added, would provide benefits of R20 billion for the government. The scheme would gain credibility from the fact that the South African VAT rate, at 14%, is currently nearly 2 points below the global average of 15.64%, and even below the average across Africa of 15.25%.

However, caution is advised with respect to this introduction. Specifically, Smuts suggests that the tax be discussed with opposition parties before a decision is made. In addition, he allows for the possibility of leaving necessities such as bread and mealie out of this scheme, or even the rolling out of the scheme on a temporary basis

One measure to generate revenues that has been in discussion for a few years amongst political parties is the introduction of wealth tax in South Africa. However, while this would help cover part of the gap, Director for Global Employer Services at Deloitte, Bernadette Abbott says that such a measure would only generate a tiny fraction of the total deficit, while simultaneously breeding discontent.

She suggests, instead, a hike on sugar taxes, which could generate R11 billion, and a spike above inflation in tax on cigarettes and alcohol, which, combined with fuel taxes, could generate another R10 billion.