For a start the additional amount needed is not high. According to the 2014 Medium Term Budget Policy Statement (MTBPS) "policy and administrative reforms will raise at least R12 billion in 2015/16, R15 billion in 2016/17 and R17 billion in 2017/18”. This amounts to less than 0,5% of GDP in each year and should tax receipts perform better than expected as so often in the past even these relatively small amounts may be further reduced.
In fact, given the need to stabilise government debt and over time reduce debt as a percentage of GDP, raising taxes by a bit more that these amounts could be justified. I have argued in the past that a tax increase of 1 - 2% of GDP is required to bring the primary budget balance more quickly into a meaningful surplus that will reduce the debt ratio at an acceptable pace.
What these relatively small amounts also indicate is that it is not necessary to do anything drastic that will compromise future tax policy - we are after all awaiting the final report and recommendations of the Davis Tax Committee. It was therefore unavoidable for the National Treasury to consult with the Davis Committee as it did to get the latter’s input on possible tax changes to avoid inconsistencies in approach.
This is also why I believe an increase in the VAT-rate is not on the cards. An increase of half-a-percentage point will raise approximately R10 billion in additional revenue and it could therefore cover the bulk of the revenue gap, with a small twitch to the fuel levy providing the rest to get to R12 billion. The reference to “administrative reforms” in the MTBPS also points to further at-tempts at improving tax compliance and thus raising the amount collected without increasing tax rates or introducing new taxes.
But then an increase in income taxes on higher-income individuals may well have to accompany any increase in VAT to preserve the progressivity of the tax system and thus render a VAT in-crease politically acceptable. (It is nevertheless worth noting that the World Bank, in a study on fiscal policy and redistribution in South Africa published in November 2014, surprisingly found VAT to be progressive, with the share of disposable income paid in VAT increasing from just under 9,5 percent of the disposable income of the poorest decile to almost 12 percent of the dis-posable income of the richest decile.)
But is it really worthwhile facing the political backlash that will surely follow an increase in the VAT rate for so little benefit? Would it not be better to keep the powder dry on VAT with a view to the funding needs of the proposed National Health Insurance System? Motivating an increase in the VAT rate in order to finance a major new policy initiative that will benefit the poor proportionately more than the rich will surely be much easier.