According to Azar Jammine, chief economist and director of Econometrix, only 5.8% of the South African population pays about 92% of all personal taxes in the country.
That segment of the population is also likely to pay around 85% of all sales tax (VAT) paid in the country, Jammine said Friday. His comments were made during a webinar by cement maker AfriSam on the outlook for the South African economy under the 2021 budget.
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Jammine said South Africa has nearly seven million taxpayers out of a population of 60 million, and the government relies heavily on higher-income taxpayers to fund its spending programs.
He added that, given the budget tax proposals for 2021, if a person were to receive a 5% raise in the coming year, an individual’s average tax rate and personal tax bill would hardly change.
Jammine said this was “a nice change” from previous years as the average tax rate and personal tax burden of individuals increased gradually.
He said that in the February 2020 budget, the government planned to have revenue of R 1.43 trillion and in October 2020 it believed it would only receive R 1.1 trillion, but now it believes it will it would get 1.21 trillion rand, an improvement of about 100 billion rand.
Jammine attributes this to higher mining profits and the skewed income distribution and tax burden in SA.
His theory is that despite many people who have suffered from Covid-19 and have lost their jobs or their pay has decreased, the people who have suffered are not primarily the taxable commodity.
“Only a very small proportion of South Africans really make up a large portion of the taxes paid,” he said.
“They have not suffered the major declines in incomes of the poorer classes and are still paying their taxes. I think that surprised the Treasury. ”
Higher earners pay more and more
Jammine said that the higher-income parts of the economy became increasingly important in terms of paying taxes, while the lower-income parts of the economy paid less and less taxes.
He said the middle class, who earn between R 20,000 and R40,000 per month, has grown in relation to the number of taxpayers from 26% of all taxpayers to 33% over the past five years.
“It’s a debilitating trend,” he said.
“The government recognized this and established that South Africa is proportionately one of the highest taxpaying societies in the world and that it would be counterproductive if they increased their personal taxes even further, and so they were encouraged not to avoid tax increases any further [in the 2021 budget]. ”
Invest less, consume more
According to Jammine, one of the main structural obstacles that have weighed on economic growth in South Africa for many years is the fact that the country has invested less and consumed more and less over time.
“This is not a sustainable way of achieving higher economic growth in the long term,” he said.
“If you don’t invest in the future, you will not be able to produce the goods and services the country needs to consume, and eventually you will become completely dependent on imports and not have a domestic production capability.”
Jammine said Finance Minister Tito Mboweni spoke last year about “the yawning mouth of the hippopotamus” and how government spending rose, but government revenues were going down and they had to do something “to close that mouth”.
Big step from the government
He said the 2021 budget purposely attempted to do this by cutting government spending from over 30% of GDP to 26% of GDP, which was “unprecedented”.
Jammine said this was achieved by cutting public sector pay. Officials received increases of no more than 2.1% the next year, 0.9% the following year, and 0.5% the following year.
“Given inflation at 4.5%, this means a real decline in public sector pay of between 3% and 4% per year over the next three years. This means that the average civil servant will have 10% less purchasing power in three years than it does now.
“This is perfectly justified, as the cost of financing public sector wages in South Africa is among the highest in any country in the world.
“Only Denmark and Norway spend more on their public services and I can guarantee you that the Danes and Norwegians will make a lot more money if they spend that money on their public servants than we do,” he said.
Jammine said this was “the real crisis” in the 2021 budget, but questioned whether the government can successfully convince public sector unions to accept the actual wage cuts needed to improve the country’s budgetary position.
“Without doing so, you will end up in a situation where our debt servicing costs relative to total government spending are increasing, displacing our ability to spend on vital social services,” he said.
The factors holding SA back
Jammine highlighted a number of structural barriers that are holding back economic growth in South Africa:
- Corruption and government imprisonment;
- The deterioration in the efficiency of state-owned enterprises (SOEs) and their ability to operate properly;
- Invest less and less and consume more and more;
- Energy uncertainty and load shedding, which have a negative impact on investor confidence;
- The high cost of data and connectivity and the need to give the wider community better access to the digital world;
- Economic policy uncertainty stemming from issues such as expropriation of property without compensation, the nationalization of the SA Reserve Bank and the introduction of a national health insurance system at enormous expense;
- Massive over-regulation and bureaucracy;
- The inadequate power of the golden triangle, with too much power in the hands of government, big business, and organized labor, resulting in small businesses not being able to see; and
- The lack of capacity of the education system to improve the technical, mathematical and scientific skills of South Africa.