(Bloomberg) -- South African Finance Minister Enoch Godongwana needs to plug a gaping hole in the budget after the nation’s 10-party coalition government shot down a proposal to sharply raise value-added tax.
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A new formulation of the government’s revenue and expenditure plan is due to be discussed by the cabinet on March 10 and presented to lawmakers two days later. Godongwana postponed his budget speech on Feb. 19 after the National Treasury’s proposal to increase the VAT rate by two percentage points to 17%, with the aim of raising 191 billion rand ($10.4 billion) over the next three fiscal years, was rejected.
These are some of his options to make up for the revenue shortfall:
Push through a smaller VAT increase
The Treasury hopes to convince the cabinet to sign off on a VAT hike of as much as 1 percentage point. That would only partially meet its funding needs, and is still likely to encounter opposition — the Democratic Alliance, the second-biggest part in the ruling coalition, and labor unions have rejected any increase in the levy. South Africa’s VAT rate is low compared to most peer countries, and the advantage of raising it is that it is easy to collect and the poor can be shielded from the negative impact by increasing the basket of exempt goods, according to the Treasury.
Raise other taxes
It would be theoretically possible to increase already high personal income tax and company tax, the Treasury’s other two biggest money spinners. But previous efforts to squeeze more out of individuals didn’t yield the targeted revenue as the wealthy found ways to avoid paying, while raising more from businesses risks stifling investment and economic growth. Other options are to increase fuel levies, which would hit consumers across the board, and up taxes on alcohol and tobacco products — although that would only bring in limited additional money. The DA says the government could collect an additional 60 billion rand annually by improving tax compliance. The national tax agency says there is scope to bolster collections, but its own budget will first have to be increased.
Cut spending
The Treasury has already pared back spending over the course of several years, which has limited the state’s ability to hire more teachers, nurses, doctors and soldiers, and re-equip the defense force. There is probably scope to effect further savings without impacting on key government services though. Calls have been made to reduce the size of the cabinet and reduce spending on advertising, travel and catering. Ensuring that cash-strapped state companies, which have regularly tapped the government for bailouts, operate more efficiently would also reduce strain on the public purse.