BUSINESS & FINANCE

Every rand spent on South Africa’s new basic income grant will be an extra rand of tax

According to Wits University professor Michael Sachs, the government might borrow money to establish a new basic income grant for South Africa, but the new plan will eventually be paid for by taxpayers.

Sachs indicated that a decision to borrow money for the new award will be based on two elements during a presentation sponsored by the Department of Social Development on Tuesday (October 26).

The state of the economy at the moment; the government’s financial situation.
Even if the government chooses to borrow rather than raise taxes directly, Sachs believes that the issue of spending and taxation cannot be separated, and that it is ultimately a “sequencing issue.”

“We may say, ‘Let’s start with the spending and wait a year or two before we start with the taxes.'” But, in the next year or two, every rand we spend on income support will result in an additional rand of taxation. Either now or in the not-too-distant future.”

While the government might obtain this money in a variety of methods, including money creation, conscription, and borrowing, Sachs believes that taxing is the best transparent, accountable, progressive, and efficient method.

He also stated that taxation has proven to be the only method that is compatible with long-term economic growth.

“Personal Income Tax (PIT) and Value-Added Tax (VAT) are, in my view, the only dependable sources of revenue in the medium term” (VAT).

“These two tools have a couple of key qualities, but the most crucial one is that they exist. In comparison to a tax that just exists as a concept in someone else’s imagination, a tax that exists and has been proved to collect revenue is a much stronger candidate.”

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While the government may impose other taxes in the future, these two taxes will have to bear the brunt of the cost for the time being, according to Sachs.

VAT vs. PIT

PIT, according to Sachs, is likely to favor the government because it is progressive and heavily focused on the country’s wealthier households.

“VAT is a broad-based tax, which means it is a consistent source of revenue. When funding something like basic income support, you don’t want the money source to fluctuate year after year.”

He cited corporate income tax (CIT) as a revenue source that is more variable than others. However, according to Sachs, there are still concerns with PIT and VAT that the government must address.

“If you focus all of your taxes on a tiny portion of the population, you run the risk of eroding that tax base and making it less dependable in the future.”

This indicates that, from an equity standpoint, PIT is the best option, while VAT is likely to be more effective as a revenue generator, according to him.

The budget is supposed to bring clarity.

When Enoch Godongwana publishes his medium-term budget policy statement (MTBPS) on November 11, he is anticipated to clarify the possibility of a basic income grant for South Africa.

Investment bank BNP Paribas stated this week in a research note that it expects the finance minister to support a reward for job seekers in the country.

“In the 2022/2023 financial year, we expect Mr Godongwana to promote a reorganization of the present grant structure and maybe the introduction of a new, more focused ‘job seekers’ grant to replace the current special relief of distress awards,” it said.

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“We estimate that this might cost the fiscus R30 billion to R35 billion each year (0.5 percent of GDP) as early as next year, implying that social protection spending as a percentage of receipts settles 2-3 percentage points higher than pre-Covid-19 levels.”

In general, BNP Paribas expects the National Treasury to continue to advocate for more rapid economic changes rather than a significant increase in social dependency on the state.

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